Going Nowhere

Well, at least last Wednesday was fun if you were a bull! The Fed raised rates by 1/4% as expected and stocks took off on the premise that there would only be two more interest rate hikes the rest of 2017. That hurt the banks and the economically sensitive sectors and gave a strong push to the defensive sectors. I remain skeptical of only two more hikes and stand by my forecast that four hikes are in the cards this year and the risk is to the upside.

Before the FOMC decision, I offered the model for the day which called for a plus or minus .50% move until 2pm and then volatility with a green close. One of our FOMC trends indicated a 75%+ likelihood that stocks would close higher. With March option expiration also last week and that being a separate and strong upside bias, the market had all of the ingredients for a rally.

However, as is often the case with outsized FOMC-driven moves, those gains or losses are usually reclaimed in the short-term. Through Friday, the S&P 500 has given back all of Wednesday’s gains. In short, the stock market’s pullback continues, however the weakness seems to be more about time than price. The major indices are moving sideways or consolidating instead of declining in price with the exception of the NASDAQ 100 which continues to power ahead, albeit at a slower pace. Both pullback scenarios serve the same purpose and should eventually lead to an upside resolution once the pullback ends, likely by early Q2.

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Fed to Hike Rates Today. Dow 23,000 Still On Track

Model for the Day
As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Three meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, there is a significant upside edge which has been accurate more than 75% of the time. Stocks also typically see a range of plus or minus .50% until 2 pm before volatility hits and a bigger move is seen.

It’s also March option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has not been seen which means that the odds favor strength into Friday’s close.

1/4% Hike Against Better Economic Picture
Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. After the December increase, the masses were not pricing in a March rate hike although I was very clear 6 weeks ago as well as in my 2017 Fearless Forecast.

“While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.”

I would say that today’s move has a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. The economy has definitely improved since the December rate hike and we have had back to back 200,000 jobs reports which are also stronger than at this time last year. The U6 or “real” unemployment rate now stands at 9.20% which is the lowest level since before the Great Recession. The stock market has continued higher. Even data from Europe is a little better.

Velocity of Money Still Collapsing
Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.


This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates
Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years.

As I have written about, I truly believe that one of the main reasons Yellen and her inner circle worry about raising rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.


A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S.-centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000 (my most recent target), 25,000 and possibly 30,000.

What’s so bad about that?
Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

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Strong Fed Trend Active Today

It doesn’t feel like it’s been six weeks since the December meeting when the FOMC raised interest rates 1/4%, but it really has. Can we get time to stand still for a month or so in order for us all to catch up? With President Trump occupying the headlines on a daily basis, Janet Yellen & Co. must be ecstatic that they out of the limelight and crosshairs for that matter.

Today concludes the Fed’s two day meeting and expectations are for no rate hike, especially after that weaker than expected GDP report last week. While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.

However, as you know, I still don’t think the Fed should hike at all. They are fighting a battle that doesn’t yet exist and risking another leg higher in the dollar’s bull market which will have grave long-term consequences. For now, I have been discussing, the dollar’s is seeing a mean reverting move to the downside as it gears up for a bigger rally later in the year.

The model for today’s stock market is plus or minus 0.50% until 2pm and then a rally into the close. One of our Fed models is active today and that suggests at least a 75% chance of a higher close.

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Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

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Apple & The Fed. A Volatile Concoction…

The FOMC begins their regularly scheduled two-day meeting today. Typically, stocks are quiet with a small upward bias. However, Apple reports earnings after the bell and that almost always provides some movement as the tech behemoth has an outsized weighting in the S&P 500, Dow and NASDAQ 100. I have absolutely no opinion on how their earnings will be and I really only care about how the market reacts anyway. The fact that it has sold off into earnings gives the bulls a slight edge to reverse the weakness by the end of the week.

Getting back to the Fed, expectations are that rates will remain as is for now with June as a less than 50% of a hike. September should be off the table as it is an election year and there is no clear and present danger to fight. So that really means that if Yellen & Co. do not hike rates in June, December is the next viable option. What a far cry from four rate hikes in 2016 as first forecast by the Fed!

Regarding the stock market, I remain in the cautious camp since last week as I believe the major indices are in the process of peaking. Apple will have a lot to do with the short-term direction of the NDX which is underperforming. None of the four key sectors are rolling over which is one reason I believe we will just see a modest pullback. Previous defensive leaders, staples, utilities and REITs are all bouncing back, but it looks like they have seen their peaks for a while and strength should be sold.

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Fed Day Again?!?!

Boy did six weeks fly by!

Here we are again. At 2pm we will hear from the Fed that interest rates remain unchanged, but their economic outlook is probably on the positive side. I also expect a comment or two about China and then the laying of groundwork for a possible rate hike six weeks from now. I still do not agree with any rate increase, but it seems like it’s coming.

The stock market model for the day is plus or minus .50% until 2pm and then a mild rally. Given the sharp run into the Fed announcement, my Fed trend isn’t as powerful as it could have been.

Stocks continue to behave very, very well and the rally shouldn’t be over by a long stretch. As I have said each and every week since the August mini crash, don’t be surprised to see fresh all-time highs sooner than later.

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Will They or Won’t They

I truly cannot wait until September 17th at 2:01 PM. At that time, the Federal Open Market Committee, aka, the Fed, will make a decision about interest rates. I don’t know anyone who isn’t completely exhausted from all of the Fed talk over the past few months. It’s enough already. How many times do we need to see “Countdown to the Fed Decision”, “Special Report: The Fed”, “Breaking News…”, etc. Are there no other business stories worthy of being discussed in the media?

Here’s the deal. Unlike almost every other interest rate cycle change, the odds of a rate hike on Thursday are really about 50-50. The Fed has laid the groundwork for the markets to expect a rate at some point since Ben Bernanke’s famous Taper Tantrum speech more than two years ago. However, something keeps getting in the way.

Should the Fed raise short-term interest rates?

The market has already done so on the 10 year treasury note to the tune of 37%. Yes, you read that correctly. The 10 year yield has risen from 1.675% in February to 2.30% as I type this. And that’s not counting the move from 1.40% back in July 2012.

Since 2008, my thesis has been and continues to be that the Fed should not raise interest rates until the other side of the next recession. This is your “typical” post-financial crisis recovery that’s very uneven. It teases and tantalizes on the upside and frustrates and terrorizes on the downside. Another recession, albeit mild, is coming over the next few years. That’s okay. We’ll get through it. On the other side of it, our economy should get back to trend or average GDP growth, not seen since pre-2008. This could also coincide with Europe getting its fiscal act together after another sovereign debt crisis.

Anyway, I don’t believe the Fed should raise rates and I will guess that they don’t raise rates today. Inflation is nowhere to be found. Rumor has it that the Social Security Administration is using 0% for the 2016 COLA increase to social security benefits. Yes, I know all about the conspiracies to limit COLA increases to help the budget, but just look around you. Transitory things like energy and grains have collapsed. Wage growth is woefully pathetic. Money velocity has been in the perfect downtrend since 1998.

While the dollar has been very stable for the past six months, that comes on the heels of a 20% rally (huge in the currency market) over the prior 9 months, which can be considered a quasi-rate hike. The very dovish IMF and ECB are begging and pleading on hands and knees for Janet Yellen to leave interest rates alone. Think of all that emerging market debt denominated in dollars that has been hammered by dollar strength and will likely get much worse. Think about the currency imbalances with the dollar appreciating so mightily. A rate hike here will not be good for our struggling trading partners in Canada and Mexico.

Why raise interest rates?

I have heard some pundits use the word “credibility”. The Fed needs to hike rates to either preserve or establish credibility. I am sorry, but that’s idiotic and doesn’t need any further rebuttal. Some believe that an unemployment rate of 5.1% represents “full” or “maximum” employment and that a rate hike is necessary to cool the jobs market. Another reason I totally dismiss as unfounded. How about the labor participation rate at 62.80%, a 38 year low?!?!

Finally, there are those who believe our economy is growing strongly enough to warrant a rate higher than 0%. To me, that argument at least has merit and I can’t easily rebut it. The recovery remains uneven, but GDP is growing. I wrote a strongly worded piece after Q1 GDP printed so poorly that I totally dismiss it as yet another bad seasonal adjustment and that I thought Q2 and Q3 would print between 2% and 3%. I was wrong. It’s even better. However, with that, let’s not forget that wage growth remains awful and inflation is non-existent.

Interestingly, while Fed members have given speeches all over the place all year, Chair Janet Yellen has been uncharacteristically silent of late. You would think that if the Fed was about to raise rates, Yellen would be stumping with at least some trial balloons or hints. The rate hike argument has persisted for two years and without it, there hasn’t been any negative consequences. Why not continue to wait…

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Fed Statement Day Trend

Once again, the markets have come to the day when the Federal Reserve Open Market Committee (FOMC) releases their statement regarding interest rates and their economic forecast. Today, we also get to hear from Janet Yellen during the post meeting press conference.

What to expect?

Absolutely nothing on the interest rate front. As I have said before every meeting since rates went to essentially 0%, the Fed is not going to raise rates today. That day will wrongly come sooner than later, but not today. Rather, we will hear about the uneven recovery, weather, wages, trade imbalance, employment growth and inflation. There’s enough ammunition for both hawks and doves to sell their case.

In the markets, the trend for today is to see a range of plus or minus 0.50% until the 2pm announcement and then a few wilder swings in both directions until the bulls take over the rest of the day. With the current set up, there is a 75% chance of a green day in the stock market based on data since 1994.

In yesterday’s piece, I wrote about how the bulls had a fairly good short-term opportunity right here and needed to step up right away. They did a decent job of that on Tuesday with solid leadership and there should be more upside coming although I still don’t believe the next intermediate-term blast off begins now.

If I had to put a single sector on my watch list for today, it’s utilities. They have been among the weakest groups all year (contrary to what I thought as the year began) and are a direct victim of the economy getting a little better and longer-term interest rates rising.

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Fed Statement Day

Today ends the Fed’s two day meeting with no action taken. Analysts will parse that statement for clues about a possible September rate hike, but as I have said for a long time, the Fed should absolutely¬† not raise rates anytime soon. Oil is tame. Inflation is non-existent. Our economy is mediocre at best. Europe is teetering and Japan is, well, Japan.

Raising rates to have some ammunition for the future is the single most absurd argument I can recall. The Fed has plenty of outside the box tools to combat whatever monkey wrench is thrown our way. Ben Bernanke’s unprecedented are proof of this. Leave rates alone.

Trading wise, the model for today is +/- .50% until 2pm and then some strength, but the trend is a weak one now as opposed to a strong one six weeks ago.

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Fed Trend Says UP, But They are Nuts to Raise Rates

Today ends the Federal Reserve Open Market Committee’s two day meeting where no action is expected to take place. Computer algorithms will be set to trade on any non-mention of the word “patience” or actual mention of the same word. Isn’t technology great?!?!

As you know, I have done a fair amount of research of Fed statement days and the trend for today is plus or minus -.50% in the S&P 500 until 2 pm and then a rally into the close. This has a 74% chance of occurring, in other words, it’s good data mining. Should stocks close higher today, there is another trend that calls for a down day tomorrow with 65% accuracy.

My own take is that Janet Yellen and the Fed are out of their minds to consider raising rate this year. The dollar soaring is a quasi right hike. Oil collapsing will create some headline deflation and cover to do nothing until it begins to recover and impacts future headline inflation. Growth in Europe is teetering on recession. China continues to downgrade their economy and Japan is, well, Japan.

Aside from trying to normalize monetary policy, which doesn’t have to be now, or provide some future ammunition to cut rates, there is absolutely no need to raise rates. And should the Fed need to cut rates in 2017 or 2018, they have already shown the creativity to make that happen with rates at 0%. Remember, it was Janet Yellen herself who indicated that short-term interest rates should have been -6% in the darkest days. That was essentially accomplished through a variety of outside the box tools including quantitative easing where the Fed bought treasury bonds and mortgage backed securities with created money.

I know my view of our economy and monetary policy has been anything but mainstream since I first forecast a $5 trillion Fed balance sheet on CNBC’s Squawk Box in 2010. This recovery is the epitome of a post-financial crisis recovery, which teases and tantalizes on the upside but never reaches escape velocity. There’s nothing permanently wrong or broken. Looking at history, it typically takes two recessions to return to normal or trend GDP growth. The Great Recession of 2007-2009 was the first and there is one more, probably mild, recession over the next few years.

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