[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early anticipatory rally bit the dust after the Fed’s announcement that they have plenty of room to raise interest rates before the economy would be negatively affected. The major indexes dove into the red but rebounded into the close.

Rate hike expectations soared with traders now considering 4 hikes by year-end to be a real possibility, but the Fed did not lean towards outright hawkishness or dovishness. ZH summed it up like this:

• The Fed says it “will soon be appropriate” to raise funds rate.
• The Fed says asset-purchases will end in March…
• And The Fed says that balance-sheet-shrinking (QT) will start after rate-hikes commence.
• The Fed intends primarily to hold Treasuries in the longer run.
• Finally, The Fed believes, “overall financial conditions remain accommodative.”

In other words, Fed head Powell walked the tight rope, and in my mind was not hawkish enough in his intent to seriously fight inflation.

Analyst Danielle DiMartino Booth described the Fed’s dilemma most succinctly:

“The Fed’s biggest challenge is figuring out how to implement policy measures that are hawkish enough to lower inflation, but that also keep financial markets afloat, because volatility in financial markets may bleed into an economy that is already showing signs of slowing. The Fed is faced with choosing the lesser of two evils.”

In the end, the Fed statement did not contain any surprises, because an early end to tapering was not announced, and neither was an earlier start to rate hikes. The most feared words that a 50-basis point hike (as opposed 25 bps expected) might be on the agenda did not happen.

However, confusion reigned when Powell released this double speak (hat tip goes to ZH):

“Economy no longer needs sustained high levels of monetary support.”

BUT…

“Of course, the economic outlook remains highly uncertain.”

Bond yields spiked, as upcoming rate hikes are now a foregone conclusion with the 2-year ripping higher and scoring its biggest jump since March 2020 causing the US Dollar to surge and almost taking out its highest level for this year. That move took the starch out of gold, and the precious metal surrendered 1.94% but remained above its $1,800 level.

Please see section 3 below for the effect on our Trend Tracking Indexes.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

While not nearly as dramatic as yesterday, the major indexes found themselves in another deep hole early on, with the Dow down over 500 points, yet they managed again to stage another rebound which, however, faded into the close.

The Dow almost broke even, but the Nasdaq got hammered again by losing -2.28%, with the S&P 500 in hot pursuit with a -1.22% drop, but worse, the index lost its psychologically important 4,400 level.

In other words, the carnage is still in full swing highlighting again underlying weakness, as the Fed’s attempt to fight inflation, even if only so far with words of tightening, continues to undermine the bullish theme.

The Fed will release its January FOMC meeting notes tomorrow, and it remains to be seen whether the recent market turmoil has convinced the powers to be to “soften” their tone from hawkish to dovish. Those are the expectations, and if they miss, you can be assured that yesterday’s early dump will prove to have been only a warmup exercise.

That means the Fed is caught between a rock and a hard place. Softening their stance will mean inflation could shift into overdrive. However, doing the right thing (in my mind), and preventing inflation (7% CPI) from worsening via higher rates and a reduction of their swollen balance sheet, will pretty much guarantee a crash in the markets.

Or will they be patsies by not committing either way?

We should find out tomorrow.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The futures markets last night indicated bullish momentum and a positive beginning in the cash markets. That turned out to be a head fake, as the major indexes collapsed after the opening with the Dow being down some 1,000 points during the session.

I took the opportunity to lighten up on some of our domestic holdings due to our TTI having dipped into the red on Friday. Contributing today’s plunge were mixed corporate earnings and worries about rising interest rates.

While nothing can be done about the former, much can be accomplished with the latter.  Worse than expected economic news from the manufacturing and services sector added to concerns that the economy might be rolling over. Traders suddenly had a change of heart in that the Fed’s intended 4 rates hike by the end of this year might not be accomplished.

Rate hike fears reversed and suddenly, risk assets were back on the front burner and a slow and steady ramp pulled the major indexes back into the green. It was a comeback based on nothing but hope that the Fed will not follow through with its hawkish policies. Should that turn out not to be the case, we will witness the markets going back into bearish mode.

This stunning comeback, supported by a short squeeze, also pushed our Domestic TTI back above its trend line and into bullish mode—at least for the moment.

Right now, I consider today’s event a whip-saw signal for our Trend Tracking Index (TTI). Should the Fed really cave on Wednesday, by not wanting to raise rates as anticipated, the bulls will have won this round, the rally will likely be back on, and I will work on replacing our closed-out positions.

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ETF Tracker StatSheet          

You can view the latest version here.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

It was a wild and whacky holiday shortened week that sent the markets stumbling. The first 3 trading days featured identical results in that early bounces turned into late session trounces, as the major indexes got spanked much to the delight of the bears.

A variety of events combined to thrash any bullish sentiment. Yesterday, we learned that the economy is not all that it’s cracked up to be with Existing Home Sales crashing 4.6% MoM, which was the biggest drop since February 2021. Next up were Initial Jobless claims that unexpectedly surged from 231k to 286k (seasonally adjusted), way off expectations of 225k, and the highest number since October.

Then we faced poor results from Peloton and Netflix, whose stock prices imploded erasing any hope of a Nasdaq rebound. Ouch! Makes me wonder what the report cards for the other tech stocks will look like.

With a whopping $3.3 trillion in options expirations on deck for today’s session, the second largest ever, there were no green numbers to be found, as the major indexes again dove into the close. The Nasdaq led the puke-a-thon with a 2.72% loss despite bond yields trying to give a bullish assist with the 10-year dipping almost 5 basis points to end at 1.764%.

Again, there was no place to hide, as all sectors were taken to the barn and spanked, while both the Dow and S&P 500 closed their third week of losses and their worst weeks since 2020. The Nasdaq is now in correction territory, which means it has come down 14.25% from its November high.

Despite Gold’s modest pullback for the day, the precious metal has now rallied for the 5^th week in the last 6 and hanging on above it’s $1,800 level, as ZH pointed out.

Our Trend Tracking Indexes both weakened with the Domestic one now having dipped into bear market territory for the first time since July 2020. Please see section 3 below for details.

What’s next? All eyes are now on Fed head Powell to see whether there is justified hope for him to start placating markets or resuming using his Q4 2018 playbook, which was more tightening followed by market implosions.

Nobody can be sure, but his upcoming policy meeting next Tuesday will likely be the most watched ever and may give some hints as to whether a dovish reversal is in the cards, or if he considers his hawkish inflation fighting policies to be of a higher priority.

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