1. Moving the markets

You could almost feel the giddiness of the Wall Street traders after Fed head Powell’s signal yesterday that interest rate hikes are on pause. He then surprised the markets with a separate statement indicating that a further unwind of its $4 trillion asset portfolio could end sooner than expected adding that market turbulence was a key consideration for this change.

In other words, the current unwinding, which is akin to QT (Quantitative Tightening), is now in the rear-view mirror, and any further softness in the markets may possibly be greeted with QE (Quantitative Easing), meaning that the Fed could step in to support asset prices. We now have a return to the Bernanke put, which is designed to rescue falling markets via a lowering of interest rates.

This is a “huuge” change and will likely mean that a new bull market is on deck, which may be confirmed by our Trend Tracking Indexes (TTIs) as early as next week. While we have seen a V-shape type of recovery since Christmas, that does not mean profits have been made. Far from it. With the losses of the last quarter, during which the S&P 500 dropped -14%, Buy-and-Hold investors have not broken even yet, but they made up a lot, as the S&P 500 recovered +7.9% in January.

Case in point: Since the effective date of our domestic ‘Sell’ signal on 11/15/18, the S&P 500 (SPY) is still down -1.18%. It means that as trend followers we did not participate in the drop and consequently were not involved in the rebound.

We now have seen as opposite of two markets as you can imagine. After the worst December in 100 years, the S&P 500 just experienced its best January in 32 years. Nothing fundamentally has changed regarding economic conditions, but the Fed has altered policy direction from hawkish to dovish.

Silly me, and I thought markets were freely traded…

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1. Moving the markets

The markets jumped right after the opening bell powered by Boeing’s earnings and better-than-expected results from Apple and Advanced Micro Devices (AMD). However, to put this in proper perspective, only 3 stocks (Boeing, Apple, McDonald’s) are accounting for 250 points in the Dow’s advance.

It’s not that the technology darlings showed a superior report card, no, it was a sigh of relief rally that the outcomes weren’t as bad as had been anticipated. After all, Apple saw not only a decline in revenue during the Holiday quarter but also a reduced sales outlook for the current period.

Also helping the bullish mood was ADP’s January jobs report noting that 213k jobs were added in January vs. 181k expected. This number by itself can give us a sense as to what the government employment report due out Friday is likely to show, although these 2 reports do not always move in sync over time.

Then it was the Fed’s turn to shine, which was akin to surrendering to the markets with this statement:

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

According to Goldman Sachs, there are some of big changes, that popped up unexpectedly:

The FOMC adds “patient” rate outlook amid muted inflation and global developments and introduces flexibility in balance-sheet normalization.

 The Fed removes a statement about “some further gradual increases.”

 The line about “balance of risks” is also removed, replaced by a line about policy “patience amid muted inflation and global economic and financial developments.”

However, the surprise came when the Fed subsequently revealed this bon mot:

 The committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.

Wow! What a turnaround from the hawkish viewpoints expressed in December by Fed head Powell. The simple translation: We will accommodate the markets in whatever form we can by not hiking rates as planned and stopping our balance sheet reduction, if necessary.

In other words, it looks like the -14% 4^th quarter 2018 loss in the S&P 500 caused the Fed to get cold feet and reverse course. For us trend followers it means that the likelihood of the bear market coming to an end just increased, and a new bull market may be on deck and begin soon.

Our Domestic Trend Tracking Index (TTI) confirms this view as it is currently positioned only -1.06% away from breaking its trend line to the upside and generating a new ‘Buy’ signal.

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1. Moving the markets

Not even poor earnings by Harley-Davidson, which dropped some 5%, as well as a collapse in consumer sentiment, with both current and future expectations plunging, could get the attention of Wall Street Traders.

As a result, the major indexes struggled for direction with the Dow eking out a small gain, while the Nasdaq led to the downside by surrendering -0.81%.

There was one thing, and one thing only that mattered and that was the answer to “what will the Fed do?” when it concludes its monthly meeting on interest rates to be released late morning tomorrow. Speculation ran rampant, and several analysts projected the outcome for the markets to be negative, despite Fed head Powell’s recent U-turn into dovish territory.

Of course, nobody knows for sure, but the pre-programmed computer algos will be the first ones to arrive at a conclusion and can push the markets in either direction, depending on their interpretation of the news headline.

It promises to be an interesting session.

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