- Moving the markets
Stocks rallied on Wednesday, bouncing back from a dismal past three months, after the Federal Reserve kept interest rates unchanged for a second consecutive time.
This led traders and algorithms to believe that the central bank would stay put for the rest of the year.
The Treasury detailed plans of the size of its future bond sales amid growing concerns of the U.S. government’s rising debt load. It appeared to be in line with what traders were expecting, with the Treasury auctioning $112 billion in debt the next week, largely matching what Wall Street was anticipating.
The 10-year Treasury yield slipped slightly after the Treasury announcement and closed down 17 basis points to end the session at 4.757%, thereby increasing its distance to the much-feared 5% level.
The Fed kept rates in a range of 5.25% to 5.5%, as was widely expected. The central bank also said that “economic activity expanded at a strong pace in the third quarter.” In previous remarks, it noted that the economy was growing at a “solid pace.”
It seems that, given the recent rise in yields, the Fed is less likely to raise rates in December, with the possibility of raising them later to keep reducing inflation, as tighter financial conditions since the September FOMC meeting have already partially achieved the Fed’s goals.
However, Fed Chair Jerome Powell at the post-decision press conference would not rule out a hike next month, saying that the idea that it would be difficult to raise rates after pausing for two meetings was wrong. Powell didn’t help early on in his press conference with some hawkish-sounding comments:
• *POWELL: PROCESS OF GETTING INF. TO 2% HAS LONG WAY TO GO
• *POWELL: FULL EFFECTS OF TIGHTENING YET TO BE FELT
• *POWELL: NOT CONFIDENT WE’VE REACHED STANCE FOR 2% INFLATION
Traders were not deterred by Powell’s hawkish tones and instead savored the fact that rates remained unchanged, which appeared to be reason enough to drive equities higher. In other words, the market only had eyes and ears for dovish thoughts and stocks ripped higher during Powell’s speech, with Nasdaq leading the charge and Small Caps rebounding into the green.
Hedge fund guru Stan Druckenmiller made the prescient observation that “bonds are adjusting to a post-QE world, but for some reason equities haven’t.” This chart makes his view abundantly clear:
When will stocks wake up and smell the coffee?
2. “Buy” Cycle (12/1/22 to 9/21/2023)
The current Domestic Buy cycle began on December 1, 2022, and concluded on September 21, 2023, at which time we liquidated our holdings in “broadly diversified domestic ETFs and mutual funds”.
Our International TTI has now dipped firmly below its long-term trend line, thereby signaling the end of its current Buy cycle effective 10/3/23.
We have kept some selected sector funds. To make informed investment decisions based on your risk tolerance, you can refer to my Thursday StatSheet and Saturday’s “ETFs on the Cutline” report.
Considering the current turbulent times, it is prudent for conservative investors to remain in money market funds—not bond funds—on the sidelines.
3. Trend Tracking Indexes (TTIs)
Fed Chair Powell hinted at a possible rate hike, but the market shrugged off his hawkish tone and focused on his dovish remarks. The bullish mood continued for another day, despite a narrow rally.
Our TTIs barely moved and stayed below their trend lines, signaling a bearish outlook.
This is how we closed 11/01/2023:
Domestic TTI: -5.76% below its M/A (prior close -6.08%)—Sell signal effective 9/22/2023.
International TTI: -2.78% below its M/A (prior close -3.52%)—Sell signal effective 10/3/2023.
All linked charts above are courtesy of Bloomberg via ZeroHedge.
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