Fed Begins Meeting. But Bitcoin!

The Federal Open Market Committee begins its final meeting of 2017 today. With the special election in Alabama and Bitcoin, does anyone really care about the Fed? For today, the stock market certainly doesn’t! With the Fed announcement that short-term interest rates are going up by .25% tomorrow at 2 pm, the market usually has a quiet day today with a slight edge to the bulls. More new closing highs in the Dow and S&P 500 but the same divergence in the S&P 400, Russell 2000 and NASDAQ 100. So much for the mild seasonal headwind so far.

Of my four key sectors, only semis continue to concern me. The others remain strong. Most of the secondary sectors are behaving just fine as well. High yield bonds are lagging, but they are not rolling over, at least not yet. The NYSE A/D Line continues to score all-time highs. The bull market remains alive and reasonably well my broken record theme of buying any and all weakness remains in place.

Bitcoin continues to be all the rage. Friends, clients, media, Uber drivers, barbers. They all want to know how to buy it. I will be writing an article about it before the holidays. So glad I mortgaged my house and put everything in Bitcoin at $50… 🙂

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But, But, But Say the Bears

Another month, another strong employment report. 228,000, new jobs were added in November, stronger than expected, as the impact of the hurricanes continues to weaken. The unemployment rate remain at a 17 year low while wages grew at an annualized rate of 2.5%, still frustratingly short of where the Fed and government wants it to be. Thankfully, it’s still slightly ahead of the inflation rate. Every month it seems like the bears get all hyped up into this report with all kinds of negative forecasts, only to be disappointed time and time again. Don’t worry. At some point, they will be right and I fully expect them to crow how they got it right all along.

As I have said all year, the theme of reality over rhetoric continues to be in play and accurate. If you get caught up in all the nonsense on Twitter and congressional infighting and North Korea, etc. you would think that things cannot be good. However, the economy is growing faster than it did in 2015 and 2016 and we all know what the stock market has done.

The Dow and S&P 500 finished the week at new closing highs, but did not make new all-time highs. That won’t matter for more than a week or so, max. The other three indices performed fine and should see new highs this month. The only serious concern I have right now is that the semis have ceded leadership and are struggling. The market can continue higher with that group, but it makes it easier if they went along for the ride. We’re seeing really nice behavior from many other sectors.

In the very short-term, there are two small headwinds to deal with. One continues to be that stocks have a very mild seasonally weak period for another week or so. Two is that rallies, especially to new highs on an employment report day often are signs of some short-term exhaustion. By that, I mean we could see a 1-3% soft patch, nothing really significant although with volatility at all-time lows, it would feel much worse than it is.

The week ahead will be squarely focused on the Federal Reserve’s final meeting of 2017 with the expectation for another 1/4% rate hike. That meeting ends on Wednesday at 2:00 pm. More on that during the week.

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Boring Fed Day On Tap

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. Six meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 75%+, however with the bulls using a lot of energy over the past few weeks, that trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

No Rate Hike But Balance Sheet Taper…

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for interest rate hikes this year. There haven’t been any surprises on that front. Recently, they have been chatting up a storm regarding a plan to reduce the size of the Fed’s $4 trillion plus balance sheet. You can expect to hear a little more about this in their statement today after they leave rates unchanged. With the Fed’s annual Jackson Hole retreat about a month away, Yellen and Company should continue to prepare the markets for a formal announcement in six weeks with lots of information released at Jackson Hole.

 

Velocity of Money Still Collapsing

Turning to a chart I continue to show time and time again, below is a 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.

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Stocks Looking Down After Rate Hike

Everything happened as expected on Wednesday. Stocks stayed in a tight range until 2PM. The Fed raised rates. Yellen spoke about reducing the balance sheet. And the bullish Fed trend was significantly muted. Given how stocks closed, there is a very short-term trend which indicates lower prices today and possibly into next week. However, with the stock market set to open lower, the opportunity to take advantage is likely gone.

The Dow is now the leading index and that’s not the index which typically leads in the healthiest of markets. I don’t expect this to continue. Mid caps have really started stepping up with small caps not looking as dead as they did a short time ago. The NASDAQ 100, on the other hand, looks like it has more downside ahead with some sideways movement coming after that.

As I always say, it’s not what the news actually is, but rather how stocks react. On Fed day, we saw good behavior from industrials, healthcare, home builders, banks, staples, discretionary, REITs and utilities. Read that sentence again. For the most part, those are not the same leaders as we have seen. Rather than the rally ending, it looks like it’s morphing after two “shock” days (big down days out of nowhere) in tech over the past month.

Now, tech may be done leading for a while, but it doesn’t look like the rally is over. Sure, we could see a pullback, but that would be yet another buying opportunity in a long line of successful opportunities.

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Fed to Hike Rates Today In Spite of Falling Inflation. Dow 23,000 Next

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. Five meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 75%, however with the bulls using a lot of energy over the past few days, that trend’s power has been muted significantly.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

It’s also June option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has been seen just on Tuesday.

1/4% Hike Against Mixed Economic Picture

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. They have been chatting up a storm in their speeches and it’s also Yellen’s quarterly news conference and economic outlook update. I would be shocked if more than Neel Kashkari dissented.

While most pundits forecast two rate hikes in 2017, I have been very clear that those expectations are too low. In my 2017 Fearless Forecast, I offered that,

“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.”

The flaw in my thinking is that I did not believe a change in the balance sheet would be a 2017 event. We will likely hear otherwise from Janet Yellen today. Markets are expecting to learn of a plan outline to begin to curb asset purchases by the Fed sooner than later. That should eventually lead to letting assets organically roll off the balance sheet rather than outright sales in the open market. The markets would be very surprised and caught off guard if Yellen speaks about a plan to sell bonds in the open market any time soon.

I would say that today’s move has a 95%+ certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Banks will then raise the prime lending rate and other rates will move off that. While the economy continues to improve, Q1 GDP was less than stellar although recently revised higher. My own work suggests that Q2 could see GDP grow close to 3% with Q3 perhaps even higher.

Monthly job creation has been very strong in four of the past five months. Only March was a lemon. I expect the growth trend to continue. The official unemployment rate hasn’t been lower since 2001 and the “real” rate or U6 is down to 8.4%, the lowest since 2007. This data certainly support a hike.

The chink in the armor and what Neel Kashkari may cite if he votes against the hike is the recent decline in inflation. From a 5 year high of 2.7% in February, the consumer price index declined in March, April and May to 1.9%. That is exactly what the Fed does not want to see as it tries to normalize interest rates.

Velocity of Money Still Collapsing

Turning to a chart I continue to show time and time again, below is a 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 www.investfortomorrowblog.com 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. While Dollar Index bounced around between the blue lines after that huge rally on the left side of the chart, all was very well and that was normal and expected behavior. When price broke above the blue line late last year, I thought the next big move had started. I was clearly and definitely wrong.

In the strongest bull markets, price should not have declined much below 100. This has been an unexpected turn for the worse. However, I am not ready nor close to being ready to abandon my long-term positive position. If my view is going to continue to pan out, the dollar will likely spend some time going sideways before gathering itself for a run to 104 and then much higher in 2018 and 2019.

I still forecast that the final bull market price peak lies ahead and at least towards the 120 level. Nothing has changed in my long-term view that the Euro will ultimately fall to all-time lows below .80 and the Pound under par. Those are the same long-term targets from 2008.

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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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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