[Chart courtesy of MarketWatch.com]

1. Moving the markets

After an early bounce, the major indexes faded below their respective trend lines and spent the session aimlessly meandering in anticipation of the Fed’s decision on interest rates tomorrow.

As I posted before, a hike of 75bps is pretty much a lock, but the much-anticipated question as to what they will do in December may not be answered. However, last month’s rally was based on traders’ assumption the Fed might pull back next month and only hike 50bps.

Should that happen, the current rally has a good chance of continuing, however, if the hawkish sentiment prevails to better fight inflation via another 75bps increase, a sell-off will be in the cards.

Given today’s stronger than expected jobs data, Fed head Powell may not cave as quickly as had been assumed and wave the torch of higher rates a while longer, as today’s terminal rate expectations chart seems to indicate—as do the December rate hike odds.

Bond yields were in a world of their own by first tanking and then ripping higher after the jobs report was released. The 10-year followed suit by dumping and pumping.

All eyes are now the Fed, and yesterday’s question, as to whether we will see a three-peat, may be answered, if not tomorrow, but likely over the next few trading days.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

During the month of September, the S&P 500 tanked and lost -9.3% with the index meandering sideways for the first 12 days of October. Suddenly, a slow climb out of that deep hole gathered momentum with all major indexes staging a remarkable bear market bounce that stopped just short of generating a new “Buy” signal for us trend followers.

For October, the S&P gained 8%, thereby recouping a big chunk of September’s losses but falling short in magnitude of June/July’s bounce back. Still, the Ramp-A-Thon occurred despite a mixed 3^rd quarter earnings season, during which the big names in the tech sector simply got wrecked with the downside “leaders” being Amazon and Facebook.

With a “so-so” earnings season, a slowing economy and worsening inflation everywhere you look, what caused this sudden change in sentiment from bearish to bullish?

The answer is found in the same old standby argument, namely that traders and analysts are absolutely convinced and ever hopeful for a Fed pivot (to at least a pause or a reduction in rate hikes), which is currently defined as a +75bps increase this coming Wednesday followed by only a +50bps hike in December.

It is critical that this plan will fall into place exactly like this, because should the Fed move +75bps in December, disappointment will reign, and you can kiss this current rally goodbye with new YTD lows likely being on the horizon.

Everything is measured in odds, and Wednesday’s forecast of a 75bps hike is a 100% lock, while the graph shows that the odds of a 75bps move have gotten more hawkish (40%).

Bond yields rose throughout the month, while prices tanked. The 10-year managed to cross the 4% level and meandered around that number yet managed to close above it.

As ZeroHedge points out, this pattern of stocks ramping on “pivot/pause” hope, while rates were rising, has not worked out well for the markets this year, as this chart shows.

Will we see a three-peat?

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ETF Tracker StatSheet          

You can view the latest version here.

WHEN BAD NEWS IS GOOD NEWS—AGAIN

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Looking at the tech wreck this week—during which heavyweights like Facebook and Amazon imploded, and the GDP allegedly grew by 2.6% in the 3^rd quarter, while economic news was horrific, as inflation expectations jumped, US Pending Home Sales collapsed to their weakest since 2010, and the Americans’ Savings rate plunged to near record lows—you would have expected the markets to pull back in the face of such deteriorating economic conditions.

However, exactly the opposite occurred, as even the threat of nuclear war could not deter traders, algos and the corporate buy-back studs from ramping stocks higher, as October winds down with one more trading day to go.

Analyst MN Gordon of the EconomicPrism.com explained it this way as inflation, contrary to popular opinion, will continue to rear its ugly head:

The big Powell pivot that’s now being telegraphed for the December Federal Open Market Committee (FOMC) meeting has nothing to do with the arrival of a much-anticipated deceleration in the rate of inflation.

Nope, it’s all politics to juice the stock market in the runup to election day.

Given that, and the now much lower hoped for terminal rate expectations, as a potential Fed pivot is supposed to be imminent, I can see that the recognition, after the mid-term elections, that the inflation monster has not yet been brought under control, could provide the markets with another surprise, namely a “rug pull” that will collapse stocks again to new YTD lows.

Bond yields popped for the day but were lower for the week, with the 10-year recovering its 4% level after having dropped below it yesterday. Despite recovering during the past two sessions, the US Dollar ended the week to the downside.

This upside charge in equities was not lost on my Trend Tracking Index (TTI-section 3), which surged this week and has now reached a point that is only -2.49% below its long-term trend line. Should this Ramp-A-Thon continue, we could find ourselves back in the market shortly.

Speaking against a robust upside continuation is the surprisingly so far spot-on historical analog to 2008/2009. Look at this chart, which may be more accurate than a 1,000 words.  

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite an early 300-point jump in the Dow, the major indexes were not able to hang on to that euphoric start, as the reality set in that all is not well with Big Tech. Both, Alphabet and Microsoft shares got hammered, with the former missing earnings expectations on the top and bottom lines, while the latter reported weaker than expected cloud revenue.

That ended a three-day winning streak, as traders tried to balance the overall earnings picture with what it might mean for future interest rate hikes. Optimism that the Fed will pivot, should things deteriorate more quickly, has been the main driver for this current rebound.

In terms of deterioration, housing appears take top billing when, after recent pessimistic reports, we learned today that New Home Sales plunged due to re-surging mortgage rates thereby wiping out the August “hope” bounce.

Looking at the big picture, we witnessed violent swings with the Chinese Yuan exploding higher, bond yields plunging, stocks pumping and dumping, the dollar getting clubbed, while crude oil and gold ramped higher.

And to be included in today’s confusion, former NY Fed President Bill Dudley called for the Fed to be hawkish for longer:

Emphasizing “longer” rather than “higher” has some advantages. It presumably reduces the risk of a hard landing: If monetary policy is somewhat tight, but not very tight, activity and employment should slow gradually. It gives Fed officials time to assess the consequences of their efforts, recognizing that monetary policy entails uncertainty and affects the economy with long and variable lags.

That said, the downside risks are significant. Because less-aggressive tightening takes longer to bring down inflation, it might allow inflationary expectations to become unanchored – a dynamic that only even-higher interest rates could counteract.

That, of course, puts a crimp in the dovish storyline that a pivot could be on the horizon, but then again, nobody can be sure about anything. We could see more follow through to the upside or a huge crash—take your pick.

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