Fed’s “All Bark No Bite” Delights Markets

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The Fed offered no surprise and followed the expected theme of hiking rates by only 0.25% with more to come. A mid-day sell-off reversed with traders focusing on chairman Powell’s acknowledgement of falling inflation:

We can now say for the first time that the disinflationary process has started. We can really see that, and we see it really on goods prices so far.

While that was music to the bullish crowd, Powell gave no real hint of a pause in hikes, maintaining that:

Ongoing increases in the target range will be appropriate to a attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

But, he appeared to shrug off the fact that financial conditions have dramatically loosened recently, as ZeroHedge pointed out, a dovish fact that surprised traders and created additional upward momentum off the mid-session bottom supported by another short squeeze.

In the end, the markets expected some hawkish tones during the presser, yet Powell did not bite but maintained a more dovish tone pushing terminal rate expectations to much lower levels. Market participants took that as a Fed in capitulation mode.

This affected bond yields, which retreated sharply, with the 10-year dropping all the way below the 3.4% level, which is its lowest point since last September. As a result, the US Dollar got spanked to its smallest since last April, while Gold shifted into overdrive by adding over 1% for the day to close at $1,967.

$2,000 gold looks to be on the horizon.

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Storming Into The Fed Meeting

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

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Traders and algos alike continued with their relentless efforts to challenge the Fed’s resolve of hiking rates for “higher and longer” by propelling the major indexes higher on the last day of the month and the day prior to the Fed’s much-awaited policy announcement.

Again, much of this January move was based on the Fed at least shifting into “pause” mode, which they eventually will, but likely because of the economy is turning over, which will then mean the rally could be short-lived due to earnings taking a hit.

For right now, the overriding theme is a bullish one with S&P 500 having scored its best January since 2019. The anticipation is for the Fed to hike only a meager 0.25% tomorrow, with an 83% chance of another 0.25% in March being baked in the cake.

A massive MOC (Market on Close) order erased all of yesterday’s losses, while the seemingly ever-present short squeeze contributed to January’s comeback. All this exuberance has now reduced the financial conditions to their loosest since June, as ZeroHedge pointed out. This is just the opposite of what the Fed wanted to see, when they called “unwarranted easing” in the last release of their Minutes.

Bond yields slipped during January, the US Dollar fell for the 4th straight month, all of which benefited Gold, as the precious metal not only surged for the 3rd straight month in a row but also gained a solid +5.74% just for January—only a hair below the S&P’s +6.29%.   

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Diving Ahead Of A High Impact Week

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

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Anxiety reigned supreme ahead of the Fed’s decision on interest rates, with the markets having priced in a meager 0.25% hike. That is despite the countless announcements by a host of speakers that “higher rates for longer” are the current policy theme, yet traders have battled the Fed every step of the way.

It’s likely that the Fed eventually will reverse its tightening schedule, but it’s questionable whether that point in time has been reached already. Wednesday’s release of their decision will shed some light on where they are at with their policies. Will the hawkishness continue? The H2 2023 Rate Cut Expectations seem to indicate so.

Adding to the nervousness in the markets will be the continued earnings barrage with some 20% of the S&P members releasing their report cards this week, including some of the tech giants like Apple, Amazon, Meta, and Alphabet.

At session’s end, today’s reality check erased all of Friday’s gains and then some, as the short squeeze ran out of ammo again.

Bond yields rose due to uncertainty about the Fed’s policy decision, the US Dollar dipped and ripped, which caused Gold to drift modestly lower yet remain firmly anchored above its $1,900 level.

We might see more of the same tomorrow.

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ETFs On The Cutline – Updated Through 01/27/2023

Ulli ETFs on the Cutline Contact

Below, please find the latest High-Volume ETF Cutline report, which shows how far above or below their respective long-term trend lines (39-week SMA) my currently tracked ETFs are positioned.

This report covers the HV ETF Master List from Thursday’s StatSheet and includes 312 High Volume ETFs, defined as those with an average daily volume of more than $5 million, of which currently 255 (last report: 234) are hovering in bullish territory. The yellow line separates those ETFs that are positioned above their trend line (%M/A) from those that have dropped below it.

Take a look:                                                                   

The HV ETF Master Cutline Report

In case you are not familiar with some of the terminology used in the reports, please read the Glossary of Terms. If you missed the original post about the Cutline approach, you can read it here.      

ETF Tracker Newsletter For January 27, 2023

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

STRONG EARNINGS KEEP THE RALLY ALIVE

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

Yesterday’s Q4 GDP report, which showed a rise of 2.9%, better than the consensus 2.6%, yet a cooldown from Q3’s 3.2%, was interpreted as bullish, and the major indexes continued to ramp higher totally ignoring that such strength will encourage the Fed to keep up its rate hiking policies for longer.

Nothing seemed to disturb that upward momentum, not even New Home Sales, which suffered their biggest annual drop since October 2021, as a revision from the November data set converted a massive surge of 5.8% into meager 0.7%. Not helping matters was the fact that cancellations are running at a higher rate than the peak of the 2008 financial crisis.

The latest batch of corporate earnings came in above expectations and kept traders focused on a potentially soft landing, with hope reigning supreme that a mild recession will not throw us into a deeper bear market. Will see about that.

Tesla stock, after having been spanked over the past year, kept its 6-day winning streak alive, and jumped some 11% after announcing record revenue and solid earnings. Beaten up technology firms like Microsoft, Nvidia, Amazon and Alphabet bounced back as well.

Also helping the bullish meme was a sudden upside move by the Surprise US Macro index, which combined forces with today’s short squeeze (+7%), the biggest one since November 10th, thereby giving the bears no chance for a comeback.   

Bond yields moved moderately higher, the US Dollar slipped, as Gold notched its 6th straight week of gains.

In the end, the markets gained on traders continued stubborn belief that there will be no “hard landing” and frontrunning the Fed’s potential for a “pivot” simply represents profits chiseled in stone, while their “higher for longer” jawboning will not come to pass.

If traders got this wrong, there will be a very rude awakening.  

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 01/26/2023

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, January 26, 2023

Methodology/Use of this StatSheet:

1. From the universe of over 1,800 ETFs, I have selected only those with a trading volume of over $5 million per day (HV ETFs), so that liquidity and a small bid/ask spread are assured.

2. Trend Tracking Indexes (TTIs)

Buy or Sell decisions for Domestic and International ETFs (section 1 and 2), are made based on the respective TTI and its position either above or below its long-term M/A (Moving Average). A crossing of the trend line from below accompanied by some staying power above constitutes a “Buy” signal. Conversely, a clear break below the line constitutes a “Sell” signal. Additionally, I use a 12% trailing stop loss on all positions in these categories to control downside risk.

3. All other investment arenas do not have a TTI and should be traded based on the position of the individual ETF relative to its own respective trend line (%M/A). That’s why those signals are referred to as a “Selective Buy.” In other words, if an ETF crosses its own trendline to the upside, a “Buy” signal is generated. Here too, I recommend trailing sell stop of 12%, or less, depending on your risk tolerance.

If you are unfamiliar with some of the terminology, please see Glossary of Terms and new subscriber information in section 9.     

1. DOMESTIC EQUITY ETFs: BUY — since 12/01/2022

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) has reclaimed its long-term trend line (red) by +7.05% and remains in “Buy” mode for the time being.

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