1. Moving the markets

Despite a slow start, the major indexes picked up some steam and closed higher with technology leading the charge as the Nasdaq added +1.15%. Assisting the advance was a positive view of Alphabet’s (Google) upcoming quarterly report card and another round of earnings by some 97 members of the S&P 500.

The markets in general continued to benefit from the Fed’s latest dovish signal that interest rate hikes were on hold until further notice. As I posted before, this fact more than any other will contribute to further upward momentum in support of equities. Of course, the continued short-squeeze helped the bullish cause as well.

On deck I see possible additional market support in form of the China trades talks, which so far have been a headwind to equity markets. That could change in a hurry if some verifiable positive headlines about the March 1 deadline (increase in tariffs) show that a solution has been found and accepted by the warring parties.

With today’s action, our leading indicator, the Domestic Trend Tracking Index (TTI), has crawled above its trend line (see section 3) into bullish territory for the first time since 11/15/18. It’s now hovering at +0.36% above the line, and I need to see a little staying power before a new ‘Buy’ signal will be triggered.

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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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