Monday, January 7, 2019

SPX and INDU Updates: Fed Fun

On Friday, Fed Chair Powell tried to reassure investors that the Fed would "listen with sensitivity to the messages markets are sending," and that the Fed "promised not to laugh, even if those messages contain spelling or grammatical errors."

The market promptly rallied 8,000 points in 38 seconds, as we largely expected it would if Powell offered a little hand-holding.

While Powell's words are no doubt reassuring, the question is, what is the market actually expecting the Fed to do, exactly?  Because Powell indicated no plans that they intended to slow down on the liquidity drain to pay off the outstanding $4.1 trillion Quantitative Easing (QE) debt that remains (accrued from 2009-14), or even that they would back away from continuing to jack interest rates like madmen.

And the Fed is historically behind the curve when it comes to spotting recessions, and tends to continue plodding along raising rates even after a slowdown is underway.  Then, months later, they announce, "We've determined that the latest recession actually began 27 months ago, right before we raised rates six more times.  The good news is:  The recession is already over!  Carry on."

In other words, the Fed's track record at ceasing rate increases isn't exactly stellar.  Now, what's interesting is that the U.S. interest rate futures market is already predicting that there will be NO rate hikes in 2019, despite the Fed's (as far as anyone knows) continuing intention to have two rate hikes -- and the futures market is on the border of actually predicting a rate CUT for 2019.

So the question is:  What bullets does the Fed have right now?  The market is already presuming the best case scenario, so the Fed can really only disappoint in that regard -- so bulls may be getting ahead of themselves.  Probably the only bullet the Fed has would be to announce a stay on the aforementioned QE roll-offs.  But right now, that would seem to be the furthest thing from the Fed's collective hivemind, so I imagine it would take a truly awful scenario for that to happen.

Anyway, just some food for thought.

Chart-wise, I still don't like the look of things.  October through December was easy money, and I kept calling for significantly more downside -- but now, things are not so clear.  This is how the market works, and we can't expect to be able to predict it every minute of every day.  Things will clarify again when they're ready to, and we won't miss much in the interim.

That said, let's take a look at the potential bad news for bulls, which is mainly found in the RSI readings:

On the flip side, there's just nothing in this pattern that screams "complete!" yet, but I can see a few options for bears if the market reverses soon:

To give an idea of why I'm hesitant to assign a preferred wave count at this juncture:  One option for bears is for a complete WXY rally (done or nearly), another is for a b-wave rally to be complete or nearly so, which then heads down toward 2430 before reversing to put in another wave higher (north of current levels), thus completing the entire upside correction.  And the bull option is for this whole thing to be a nest of 1's and 2's to continue to launch higher -- but I have to assign that the lowest probability of the three at this point, because the longer-term chart seems to argue against it.  Nevertheless, I can't rule it out, so bears shouldn't be too complacent here.

In conclusion, the wave counts remain unclear, so we'll simply have to take it as it comes for now.  Trade safe.

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