There’s a little known fact about the Yinzer Analyst, he loves FOMC announcements although not for the usual reasons. I’ve never built an investment strategy around an FOMC press release, but I love watching the market reaction as those strategists and economists digest the release in thirty seconds or less and broadcast their expert opinions to the financial masses. Once upon a time I was planning to be a history professor but decided there wasn’t much excitement in the history of European banking. Say what you will about the equity markets, the efficient market hypothesis or “investment strategists” in general, the stock market is never boring!
Before getting into the meat and potatoes of today’s FOMC announcement, let’s start by keeping our the technicians among us happy:
Starting with an intraday chart; you can see that it was pretty much back and forth all day until the FOMC announcement at 2 p.m. After the initial release action, it only took a few minutes to digest the report, which to be honest, was largely vague with the exception of the upgrade to the language describing the U.S. economic outlook. What was more likely was that it only continued the uncertainty over the first Fed rate hike, which added to the relatively weak earnings reports minus Apple and the uncertainty in the EU over Greece made it easy to justify selling and protecting gains. Protecting gains was key today and I think directly influenced the gold miners, but we’ll talk more about that later.
Moving on to the daily chart, you can see that we’ve decisively cracked the wedge pattern and can call it dead, but you knew that already because you’ve been coming here faithfully right? The weak purchasing power oscillator and CMF scores never confirmed the bounce in early December so it’s not surprising we’re heading back to the December lows. Moving on to chart 2 were you can see a clear consolidation trend going on, it could extend for another few days unless volatility picks up over Greece or earnings reports here at home.
Longer term, the S&P is back to prior support/resistance although a move back to 1975 wouldn’t be unexpected. Between the current levels and the next strong support around 1880-1900 are the last legs of the 2012 uptrend and the 50 week moving average that converge around 1950.
What’s more interesting to the Yinzer Analyst is that the breakdown on the FOMC announcement has introduced a new dynamic into the momentum model I’ve been developing. Each relatively low point around our current momentum levels in 2014 was met by a sustained bounce of somewhere between 4%-8%, but the game has changed since the end of QE3. The bounce in mid-December after a momentum low on December 16th is all but gone and rather than our scores entering positive territory like in past rallies, the mid-January bounce never got my momentum scores into positive territory, they just became slightly less weak. Unless a new market dynamic enters the game soon, more weakness is in store for us.
Last chart of the day is the MarketVectors Gold Miners (GDX), which saw a steep 3.98% drop on the day although it’s still positive for the week. What’s surprising to me is the reaction to the FOMC announcement…it’s sort of having your cake and eating it too moment. While rate hikes are still potentially on track for this summer and will have a serious impact on real interest rates and opportunity costs, the likelihood of rates rising by more than 100 bps is fairly low while uncertainty in the broader equity markets will likely remain high. This smacks more of profit taking or closing out positions to cover cash calls elsewhere. Fortunately, GDX is close to prior support and with the FOMC statement out of the way, the next few days might see a bounce as investors focus on equity risk rather than potential rate hikes. But how certain is the FOMC statement?
Planning for the Fed:
If there was one thing I took away from my past life as an investment analyst, is that planning your trades around FOMC press releases is an exercise in futility. The FOMC statements aren’t clear, will never be clear and there’s no point in praying/hoping/demanding otherwise. Your best plan is to work your own long-term game and use the FOMC statements as a signs of twists and turns in the road. The FOMC has been signaling for some time that it wants to hike rates and end what it considers to be “extraordinary monetary policy” so why are investors so surprised when they confirm this at every meeting?
Yes, they upgraded their language on the strength of the U.S economy, saying that output is now expanding at a “solid” pace, up from “moderate.” Remember, there using recent data to forecast the future, so who knows how they viewed the recent durable goods reports? What they’re more concerned about is the employment situation. National unemployment rates are back to averages typically seen just prior to a rate hike. Yes, participation is lower, but the Fed has viewed this as a long-term structural trend and more importantly to the Fed, gas prices are low and falling. Think of it as a huge bump in potential consumer spending that doesn’t require a big growth in wages.
And what about inflation? Yes, its low and yes it’s going to stay low as long as the dollar continues strengthening and guess what? As my old hunting buddy used to say “I care, but only so much.” The Fed cares about inflation, but has never been serious about letting it go above 2% or even getting it close to 2%. As soon as inflation expectations reached 1.7%, Chairman Bernanke started talking the end of QE3 and the potential for policy normalization.
So does that mean rate hikes are guaranteed? Absolutely not and the two year bond yield dipped 4 bps on equity weakness as concerns over Europe and earnings took precedence over rate hikes but what does that mean for you? That’s up to you decide, just remember, the Fed is not now, nor has ever been your friend. If you’re a long-term investor; make your plans around valuations, future earnings and relative momentum, not what a bunch of bankers in Washington are planning to do with interest rates.