Friday, January 4, 2019

SPX Update: Fed, Jobs, Inflection Point

Lots going on today that has the potential to move the market.  Nonfarm payroll was released before the open, and showed another very strong number, which may help mitigate recession fears among some.

As we know, though, the market is not directly driven by the economy, but is instead driven solely by liquidity, which MAY result from a strong economy.  But that can be mitigated by other factors:  in this case, the interesting ongoing factor is that the Fed continues to drain liquidity from the system as they pay off the Quantitative Easing programs that lasted from 2009 until 2014.

As most readers know, during that time the Fed added a completely unprecedented $4.5 trillion to their balance sheet, and that money largely drove the stock and commodity rallies we saw during that time (as most recall, the real economy was still pretty weak -- most of the "jobs" being created from 2009-14 were on the order of "part time fry cook").

The Fed has been rolling off (paying down) that debt for the past year plus, and -- amazingly -- the market still hasn't crashed.  This is a testament to the strength of the REAL economy (for the first time in decades), because the real economy is generating enough liquidity to offset the Fed's negative actions and at least keep the market more or less steady.  So far, anyway.  Those who lament the market's negative performance of 2018 have no idea how bad it COULD have been, in a weaker economy.  Early on, just looking at the pending Fed liquidity drain, many were worried about a 2008 redux.

And, to be fair, we're not out of the woods yet.

Powell speaks today, and his tone may further impact the market.  Many of us believe that the Fed raising rates ON TOP of draining QE is too much to ask of the market -- so if he takes a dovish tone, that would help equity investors feel a little less like the Fed is actively attempting to crash the market.

Chart-wise, the market continues to remain range-bound, and has thus kept its options open.

In conclusion, we're still stuck at an inflection point, but if the correction to 2447 was bullish, then there are enough waves down and the market is free to rally to new highs from here.  If that level (2447) breaks, then bears have options to regain control of the intermediate time frames.  Trade safe.

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