Stocks were all over the place yesterday as we might expect on an FOMC meeting day. The Fed did increase interest rates by 0.50% to a 15 year high. For some reason stocks were up quite a bit before the release of the policy statement as investors seemed optimistic. While stocks reversed course afterward, the reaction was actually quite muted considering how hawkish the Fed sounded, despite the recent dip in inflation expectations. The Dow ended the day down 142-points but it had been up almost 300 before the Fed announced the rate hike. You will see below why that wasn't so bad.
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There was a lot of head scratching after the close yesterday that the market held up as well as it did considering what the Fed said. Perhaps it is because the next FOMC meeting and Fed rate hike would not occur for another 7 weeks, so investors figured it can't get any worse for almost two more months.
I don't know if that's the case, but what we do know is that the Fed raised its Fed Funds Rate by 0.50% as expected, taking it to a targeted range between 4.25% and 4.5%. But the surprise was that they said that they expect the target rate to go to 5.1%, which is higher than the 4.6 that it had previously been saying.
For the market to almost dismiss that, holding up rather well considering the hawkish tone from the Fed, is a little surprising. Perhaps it is a bullish sign as we head into the most favorable seasonal period of the year, or perhaps we will get a hangover going forward after investors digest what was said.
The S&P 500 closed at 3991 on Monday. After the CPI on Tuesday and the Fed interest rate hike, it closed at 3995 yesterday. That means that it held onto Monday's big gains so perhaps everything was priced in correctly? Of course it won't stay at 3995 but I just thought it was interesting that we only saw a 4-point move after all the hype leading into the last two days.
Jeffrey Gundlach, the "Bond King", has been saying that the Fed follows the 2-year Treasury Yield. That sounded about right as the 2-year had been rising and it got as high as 4.7% in November, and the Fed had a target rate of 4.6% before today, so it made sense. But now they are targeting 5.1% and the 2-year Yield fell to 4.2% since that high in November. More head scratching.
And with all over the yield inversions, a recession seems likely although they keep talking about a possible soft landing. Others are calling for worse but with 3-month yield higher than the 2-year, which is higher than the 10-year, which is almost the same as the 30-year, something unusual is happening and there probably has to be a fallout.
I don't want to pretend that I understand all of this. I am just following the charts and trying to figure out which way they are going, whether stocks or bonds. So all this head scratching from the experts is probably making the charts a little confused as well and, as I said, now seasonality kicks in and we may not get the "real" direction that stocks want to go until after the holidays.
The 10-year yield moved up but not all that much considering the hawkish Fed, but this chart actually looks more bearish (bullish for bonds prices) but again maybe the real reaction to stocks and bonds is yet to come.
This next info is for entertainment purposes and not a prediction of any kind (from me.) "Cassandra B.C." is Michael Burry's display name on Twitter. Michael Burry is of course the fund manager depicted in the movie "The Big Short" and is famous for calling, and betting heavily on, the collapse of the housing bubble during the financial crisis of 2008.
While I was putting together my commentary I saw he posted this on Twitter.
That's the chart of late 2001 and 2002. That dot com bear market lasted from 2000 to the fall of 2002. Just like now everyone is trying to call the bottom of this bear market, and hence his post about WorldCom and the fate of the market in early 2002. He sees a similar outcome.
I marked the last half of December of 2001 as an aside that we even got a Santa Claus rally right in the middle of that debacle.
The S&P 500 (C-fund) was down moderately yesterday after the Fed raised interest rates, erasing a healthy early gain. It is back below both of the 200-day moving averages, but still just a stone's throw off the 3-month high it made on Tuesday. The 4100 area has acted as a tough area to get above. There are certainly some fundamental reasons to be concerned here as the Fed turned more hawkish, but we head into the historically strongest week or two period of the year for stocks. The trend is up, it is above the 50-day EMA and I would say as long as it remains above that 3900 area the bulls will keep buying dips, but if that support breaks, watch out.
The DWCPF (S-fund) was down about a half of a percent and is in a similar technical situation to the S&P 500 chart above.
The EFA / I-fund was more flat on the day but it will be interesting to see what the TSP does with its price since the FOMC rate announcement came well after the overseas market were closed and stocks in the U.S. were still up. Unfortunately the TSP posts the share prices later than they used to and I typically complete the commentary before they are posted on their website, so all I can do is speculate.
BND (Bonds / F-fund) was up for some reason. I say that because most yields were up yesterday and they normally move in opposite directions. The chart found the rising support line and held again after filling in a small open gap from Tuesday's CPI gap up.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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There was a lot of head scratching after the close yesterday that the market held up as well as it did considering what the Fed said. Perhaps it is because the next FOMC meeting and Fed rate hike would not occur for another 7 weeks, so investors figured it can't get any worse for almost two more months.
I don't know if that's the case, but what we do know is that the Fed raised its Fed Funds Rate by 0.50% as expected, taking it to a targeted range between 4.25% and 4.5%. But the surprise was that they said that they expect the target rate to go to 5.1%, which is higher than the 4.6 that it had previously been saying.
For the market to almost dismiss that, holding up rather well considering the hawkish tone from the Fed, is a little surprising. Perhaps it is a bullish sign as we head into the most favorable seasonal period of the year, or perhaps we will get a hangover going forward after investors digest what was said.
The S&P 500 closed at 3991 on Monday. After the CPI on Tuesday and the Fed interest rate hike, it closed at 3995 yesterday. That means that it held onto Monday's big gains so perhaps everything was priced in correctly? Of course it won't stay at 3995 but I just thought it was interesting that we only saw a 4-point move after all the hype leading into the last two days.
Jeffrey Gundlach, the "Bond King", has been saying that the Fed follows the 2-year Treasury Yield. That sounded about right as the 2-year had been rising and it got as high as 4.7% in November, and the Fed had a target rate of 4.6% before today, so it made sense. But now they are targeting 5.1% and the 2-year Yield fell to 4.2% since that high in November. More head scratching.
And with all over the yield inversions, a recession seems likely although they keep talking about a possible soft landing. Others are calling for worse but with 3-month yield higher than the 2-year, which is higher than the 10-year, which is almost the same as the 30-year, something unusual is happening and there probably has to be a fallout.
I don't want to pretend that I understand all of this. I am just following the charts and trying to figure out which way they are going, whether stocks or bonds. So all this head scratching from the experts is probably making the charts a little confused as well and, as I said, now seasonality kicks in and we may not get the "real" direction that stocks want to go until after the holidays.
The 10-year yield moved up but not all that much considering the hawkish Fed, but this chart actually looks more bearish (bullish for bonds prices) but again maybe the real reaction to stocks and bonds is yet to come.
This next info is for entertainment purposes and not a prediction of any kind (from me.) "Cassandra B.C." is Michael Burry's display name on Twitter. Michael Burry is of course the fund manager depicted in the movie "The Big Short" and is famous for calling, and betting heavily on, the collapse of the housing bubble during the financial crisis of 2008.
While I was putting together my commentary I saw he posted this on Twitter.
That's the chart of late 2001 and 2002. That dot com bear market lasted from 2000 to the fall of 2002. Just like now everyone is trying to call the bottom of this bear market, and hence his post about WorldCom and the fate of the market in early 2002. He sees a similar outcome.
I marked the last half of December of 2001 as an aside that we even got a Santa Claus rally right in the middle of that debacle.
The S&P 500 (C-fund) was down moderately yesterday after the Fed raised interest rates, erasing a healthy early gain. It is back below both of the 200-day moving averages, but still just a stone's throw off the 3-month high it made on Tuesday. The 4100 area has acted as a tough area to get above. There are certainly some fundamental reasons to be concerned here as the Fed turned more hawkish, but we head into the historically strongest week or two period of the year for stocks. The trend is up, it is above the 50-day EMA and I would say as long as it remains above that 3900 area the bulls will keep buying dips, but if that support breaks, watch out.
The DWCPF (S-fund) was down about a half of a percent and is in a similar technical situation to the S&P 500 chart above.
The EFA / I-fund was more flat on the day but it will be interesting to see what the TSP does with its price since the FOMC rate announcement came well after the overseas market were closed and stocks in the U.S. were still up. Unfortunately the TSP posts the share prices later than they used to and I typically complete the commentary before they are posted on their website, so all I can do is speculate.
BND (Bonds / F-fund) was up for some reason. I say that because most yields were up yesterday and they normally move in opposite directions. The chart found the rising support line and held again after filling in a small open gap from Tuesday's CPI gap up.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
Thanks so much for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
