[Chart courtesy of MarketWatch.com]

1. Moving the markets

It seemed like traders and computer algos alike tried to mitigate the poor results of a dismal month by pumping the major indexes during the last two sessions with support from month-end rebalancing.

For sure, some losses were cut, but the major indexes still suffered a beating with the Dow faring the best by only surrendering -3.3% as opposed to the S&P 500’s -5.3% and the Nasdaq’s -8.9%, its worst month since March 2020.

The Nasdaq is still in correction territory, 13% off its high, while the S&P 500 has dipped below this 10% threshold but recovered to currently being off its high by only 7%.

High volatility and huge volumes combined with panic selling and panic buying has now created an environment, whose direction is still in doubt. That is further emphasized by the big boys on Wall Street, some of which hold diametrically opposed opinions. For example, JP Morgan opined that “We Go Higher,” while Morgan Stanley counters “Sell Rallies.”

This total uncertainty has been reflected by the behavior of our Domestic Trend Tracking Index (TTI), which has chopped above and below its dividing line between bullish and bearish territory. After hanging around in negative territory for a few days, the index managed today to crawl back above it (section 3 below), as the bulls found some month-end support.

Now that January is over, I would not be surprised to see a resumption of the recent sell off, as none of its causes have been rectified, and this 2-day ramp merely represented a bounce from an oversold position and the effects of rebalancing.

Nevertheless, should this rebound continue, we will cautiously add the appropriate equity positions back into our portfolios.  

ETF Tracker StatSheet          

You can view the latest version here.

A WILD WEEK CLOSES WITH A BOUNCE BACK

[Chart courtesy of MarketWatch.com]

1. Moving the markets

After 3 consecutive weeks of losses, the S&P finally managed to eke out a 0.8% gain, but it was a hard-fought battle with the move to the plus side happening during the last hour of trading today.

Boosting the major indexes was Apple with a 7% advance, while some of the heavy hitters like Microsoft, Amazon and Google finally gave an assist after having been beaten down earlier in the week.

Also helping the bullish cause was month-end pension and mutual fund rebalancing, which ZH estimates to be about $65 billion. This meme may very well come into play again on Monday, the last trading day of the month.

Commented MW about this week’s volatility:

The major indexes have experienced outsized swings each day this week — including the Dow making up a more than 1,000-point intraday deficit to close higher on Monday for the first time ever. The S&P 500 has posted an intraday range of at least 2.25% every day this week, according to Bespoke Investment Group.

Despite today’s rebound, the S&P 500 is on pace for its weakest month since March 2020, while the Nasdaq looks to be hit the hardest by heading for its not only worst month since 2008 but also towards “the worst month of the year of all time.”

ZH expounded further on the reality of what we are witnessing:

Despite today’s panic-buying, this is the worst start to a year for the S&P 500 since 1939 (and on course for its worst January ever)…

Ouch!

Even though we rebounded into the weekend, the economic environment looks anything but rosy. We saw Pending Home Sales tumbling, likely due to higher mortgage rates, and December US Durable Goods collapsing the most since the beginning of Covid.

Today, we watched Q1 GDP forecasts puking big time with the Atlanta Fed’s expectations crashing to just about zero, as this chart shows. As a result, the much tracked December 2022 Rate-Hike expectations shifted toward a more dovish mode (fewer hikes), which helped the major indexes to ramp sharply into the close.

Looking at inflation, it seems that the Fed is at a fork in the road between popping the stock market bubble via higher rates or allowing persistent inflation to brutalize the middle and lower class. Depending on their choices, the markets are still at a level where a breakout in either direction is a distinct possibility.

You can see the effect of this month’s madness on our Trend Tracking Indexes (TTIs) in section 3 below.

[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.

[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.