Did the Fed just cop to something very important? Are they freaked about something I’m seeing in charts? If they’re seeing what I’m seeing they should be freaked out.
Let’s start with the former: A very oddly timed dialing back of expectations by Jay Powell and Mr. Bullard today. Markets had been feverishly pricing in a 50bp rate cut for July, but found Powell suddenly wavering, just a few days after $SPX made a new all time high. Cold feet or just clever jawboning? After all, hit the full dove button when markets are in trouble, as they were at the beginning of June, see dozens of Fed speeches and a dovish Fed meeting result in a 200 handle rally on $SPX to new all time highs, and then dial back expectations just a bit.
Hey, maybe things are not so bad, after all mission accomplished. Markets out of the woods and confidence back. If that’s the jawboning mission, well played.
There’s just a few problems with that theory.
One is the obvious I’ve been pointing to but which the Fed will never admit. Things are worse than last time and the Fed is just working with extreme limited ammunition. As I’ve said before, they need to be extremely judicious with rate cuts. So better to just jawbone, dangle the rate cuts, get the desired reaction, and then dial back expectations just a little and wrap it in “confidence” that things are actually much better.
How disingenuous. Things are always better after a 200 handle rally on the S&P 500, and they are always just a bit worse after a 200 handle drop. It’s called playing markets like day traders. Every speech is used to massage market expectations and participants jump to attention like lapdogs looking for a treat.
So Jay Powell may have admitted to something he best not want to admit to publicly: The Fed has limited ammunition and is worried. Worried that they use their limited ammunition too soon and worried not having enough when a recession begins in earnest. If this is so, then markets may end up disappointed quickly. After all July is just around the corner and unless a sudden China deal brings hope back in a major way then disappointment may be the theme of the summer.
Also coming soon: Earnings and they may be a lot less cheerful than new all time highs on $SPX last Friday indicated.
Speaking of these all time highs: Fake. Why?
Below their 200 day moving averages:
Transports, banks, small caps.
But by all means, keep celebrating last Friday’s all time high on $SPX and keep calling it a bull market.
— Sven Henrich (@NorthmanTrader) June 25, 2019
Why? While $SPX made new all time highs $BKX is languishing below its 200MA:
It’s a horrifically weak chart and did not rally on those new $SPX highs.
Horsemen don’t travel alone.
Here are transports, also below their 200MA and showing a potential topping pattern that, if triggered, could target the December lows again:
Small caps are, pun intended, in a $RUT:
Also below their 200MA with their underlying volatility index still showing a bullish structure.
Now put these all together versus the almighty S&P and you get a rather stark picture:
None of these 3 key indices participated in the $SPX rally to new all time highs, couldn’t even make it close to their April highs. It’s pitiful, and these charts speak about the economy at large.
But worse for bulls and the Fed this specific weakness is, historically speaking rare and has foreshadowed significant additional weakness to come.
Via Sentimenttrader who’s been watching the same indices:
Within days of the S&P 500 hitting a new high, the following all collapsed to a relative low:
* Small caps
This has happened twice in 40 years, both leading to a 15% drop in the S&P w/in 2 months. pic.twitter.com/YEtEeuNdXv
— SentimenTrader (@sentimentrader) June 25, 2019
A 15% drop from here or even from new highs would be a problem, a big problem as it would trigger all these larger topping patterns we’ve been discussing. Remember the technical target zone would be much lower.
Which brings us the the 4th horseman, junk ($JNK), all of this rallying is driven by high yield credit, it’s a huge distortion permeating the market landscape. And markets cannot rally without junk these days. In May Junk caught the sniffles and markets puked. Jay Powell has now served as a trigger for $JNK rallies several times since the December lows:
But not today. Markets wanted to hear confirmation of a 50bp rate cut in July. The lapdogs wanted a treat and didn’t get it and are now pouting.
But look, now $SPX has failed the 2940 zone for the 3rd time in a row and 4 horsemen are not happy.
If a 15% correction is to come, then a lot of chart patterns would be even more broken than they are now and major topping patterns may fully trigger.
“And I heard a voice in the midst of the four beasts And I looked and behold, a pale horse And his name that sat on him was Death And Hell followed with him”.
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Categories: Market Analysis