This was a very interesting week and it provided plenty of 2 way action for traders. From a technical perceptive last week we discussed the relevance of the 21 day moving average as a point of key resistance for markets. And sure enough the entire week was marked by repeated pings and rejections of this moving average which I highlighted in MA Rejects and pointed out repeatedly on twitter:
$ES versus 21 MA pic.twitter.com/VJagwDTewZ
— Sven Henrich (@NorthmanTrader) February 22, 2018
On Wednesday we saw efforts to recapture the 21 MA fail when the Fed minutes produced a spike in the 10 year yield to 2.95% and this resulted in renewed selling. The lines were clearly drawn in the sand and the message was clear: Markets did not like yields rising and concerns of a 10 year heading toward and above 3% provoked heavy selling.
In fact, a pattern emerged from Tuesday through Thursday, magic up gaps and open ramps based on overnight low volume price levitation and then a complete breakdown in internals during the day producing selling into the closes:
Clearly this market needed calming down and we saw this in the tried and true form of jawboning by policy makers and officials, and boy did markets get the royal treatment.
The first thing to note was that all selling into closes was eradicated at night and markets started gapping up every day resulting in a reversal of the negative internals from the day before as you saw in the chart above. Here’s the overnight action marked on $ES:
The nature of this type of action was not lost on experienced market observants and I quote Todd Harrison who made this humorous observation:
Been reading the tape almost 30 years; staring at screens watching ticks.
If the overnight sessions aren’t manipulated, I’ll give up chocolate for good.$spx $ndx
— Todd Harrison (@todd_harrison) February 23, 2018
I point all this out as there are still large agendas at play when it comes to markets. Here’s what I told clients before the open on Friday:
“And while markets continue to fail to hold above the 21MA during the day why not just gap above it in overnight action:
The agenda is clear: The close above it and target 2800+ by next week for month end. After all JPM is out there telling everyone that pension funds have to buy a lot of stock before the end of the month for rebalancing.”
How to get it accomplished? A magic show of jawboning. The 10 year yield had to retreat from the 2.95% level.
And the jawboning was fierce. First Treasury Secretary Mnuchin came out telling everyone that we can have our cake and eat it too. Wages will rise, but no inflation will happen and debt, don’t worry, it’s all good. No really that was the message.
One guy wasn’t having it. At all.
Mnuchin: policies will raise wages w/out inflation. Yeah, sure. And we are going to expand the Buffalo Art Museum without making it bigger.
— Jeffrey Gundlach (@TruthGundlach) February 23, 2018
And then came the Fed in all their glory. Having been a keen observer of markets and the Fed for years there’s one certainty that has emerged when it comes to the Fed: When markets get wobbly the Fed gets dovish. And in addition to all the dovish Fed speakers we got in the middle of the week (See Fed Watch) Friday saw a parade of 4 Fed speakers in addition to a dovish report to calm fears about 4 rate hikes:
Q: How many Fed speakers does it take to get $SPX back above the 21MA on a Friday?
A: 4#Dudley#Rosengren#Master#Williams pic.twitter.com/2PiDWr9w9s
— Sven Henrich (@NorthmanTrader) February 23, 2018
The messaging was consistent across the board and the intent was clear: Calm markets by suggesting slow rate hikes, no need for 4 rate hikes, oh, and it doesn’t hurt to take on a favorable open door policy for bringing back QE if needed:
“Mr Dudley — a voting member of the monetary policy setting Federal Open Market Committee — argued that large scale asset purchases “should be viewed as a viable tool in our arsenal to be used when the zero lower bound is a relevant policy concern”.
The effect: Drop the 10 year and mission accomplished as stocks rose while yields dropped reversing the concerns of Wednesday:
Correlation Watch folks.
Bottomline: Key indices reparied the technical damage within the last hour on a Friday:
As long as these MAs hold then buyers have open road to head toward the next fib level into 2800 and perhaps the open gap at 2850:
However there are larger concerns that suggest bulls are not in the clear yet, not in the slightest.
Firstly note the vast discrepancy in markets driven by even fewer stocks than in 2017.
Amazon nation I called it:
Indeed only 7 stocks of the $NDX 100 make up for 70% of its gains this year:
$NDX YTD attribution $AMZN 28% $MSFT 12% $NFLX 7%, $AAPL 6%, $NVDA 5.5%, $CSCO 5%, $GOOG 7% 7 STOCKS = 70% of the YTD attribution
— Thomas Thornton (@TommyThornton) February 23, 2018
Not a healthy picture from my perch.
And despite the rally on Friday we can observe that $SPX is on its 2nd inside week in a row:
…and price may find itself pressed against trend line resistance again in short order:
What say you Mr. $VIX?
What should be clear from this week’s action: Markets are sensitive to higher yields and the Fed is sensitive to market volatility. Next week Jerome Powell will give his first semi-annual testimony in front of Congress. Powell ain’t Yellen I wrote before. Now he has a chance to prove it, but so far his underlings seem to send a clear message: Business a usual.
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Categories: Market Analysis
Thank you for your excellent commentary.
As in the last cycle, the Fed has targeted stock markets and housing, mostly for the benefit of Wall St.; having done little for the benefit of Main St. Please also consider that market participants are following the Fed’s lead in their Pavlovian response of “BTFD”. I’m personally short the markets here, esp. the FANG stocks, but the bubble is broad based and so there’s no reason to avoid the indicies and broader markets as well.
The Fed is between a rock and a hard place for a couple of reasons. 1) Interest rates need to be at the natural rate; they’ve been held at the zero bound for too long – result = “The Everything Bubble” – and the Fed is way behind the curve once again. 2) The Fed would like the crash to be on Trump’s watch to benefit the “other” party in 2020, but pensions and HNW progressives would also be caught in the downdraft. What to do? Quite the conundrum indeed.
Finally, the Fed can certainly prolong and extend the cyclical bull market via their machinations and other nefarious schemes, however the market and business cycles cannot be suspended. This was clearly demonstrated in 2000 and again in 2008. This cycle at nearly 9 years is clearly well beyond the averages, long on the tooth, and due any time for the inevitable reversion to the mean.
My money is on history. The Fed is doomed to fail again. I don’t think we’ll have to wait long. John Hussman’s work clearly shows what’s coming next, but sentiment/psychology matters most in the near-term.
“Trees don’t grow to the sky.” – Louis Rukeyser
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Benjamin Graham
Advocate for free markets and sound money (this may take a while). End the Fed.
“I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.” – Andrew Jackson, 1834, on closing the Second Bank of the United States; (unabridged form, extended citation)
Hard times for the bitter bears…just when they finally think they saw some light early Feb., bam, market’s back to marching to retest previous highs.
No matter how you slice and dice it, the market is just so strong and keeps on trucking along.
Yeah, the Feds, the market manipulators, the proverbial phantom “they”, all ganged up and manipulated market higher, blah blah blah, so what?
Instead of finding solace in blaming the unknown dark force conspiring to move the market higher, why not join them?
What a simple idea, right? So simple, you’d be so much richer for the past 6 years just by keeping it simple, and even with the Feb’s historical huge sudden drop, as long as you didn’t fancy up your investment by shorting the VIX at its historical lows, you are still much much richer than you were last year, and the year before that, and before that, etc.
Looks like the only thing all bears can do is to blame the elusive “dark force” all conspiring against them, so that they can make themselves feel better and hope their clients don’t flee.
Why not keep it simple: stop blaming the “dark force” conspiring against you, start joining the big ass market trend, which is still up and strong…sure hedge and protect the down side by all means, but for God’s (and your bank’s account) sake, join the bulls and the “dark force” instead of fighting it.
1) Long until Jan. Now short.
2) Upside is small, but downside is big from here. Risk management.
3) No blame, just common sense investing.
4) Re: the “dark force”. The Fed: “Doing more harm than good, since 1913”. Recall that they were on the watch during The Great Depression as well. Seemed pretty bad to me. Late 1920’s similar to now. Check the purchasing power of $ since then. Now <5% (normalized to 100).
You have your reality and I have mine.
“This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.” – Morpheus, The Matrix, 1999
Fortunately, the market is not a “take the blue pill or the red pill”, live or die kind of dramatic fantasy land.
It’s actually very simple: see the trend, follow the trend (while properly provide down side), that’s it.
You don’t need to put yourself in a fantasized land and dramatized state to invest and grow rich with time.
It’s comforting to fantasize yourself suddenly facing a “blue pill vs red pill” situation… I mean, who wouldn’t want to be Neo?
Fortunately, the market doesn’t work that way. Market is all about trend, the simplest and the most stress free.
What a meaningless post.
“It’s actually very simple: see the trend, follow the trend (while properly provide down side), that’s it.”
It’s actually very simple. Invest in stocks when they’re doing well, and protect yourself for when they don’t do well.
That’s almost exactly what you just said. Totally meaningless “advice.” When does the “trend” end?When the market is down 15%? 20%? 40%?
People who followed the trend in late 99 took over a decade to get back to even.
A stunning display of the Dunning-Kruger effect. Thanks.