Now as I posted on Monday I don’t think we are on verge of a serious stock market decline, because the window for one is quickly closing. But we could easily see some profit taking after today’s Fed release. You see the last time The Federal Reserve released a policy statement was in July when it lowered interest rates for the first time in almost a decade. The stock market sold that news hard – supposedly in disappointment in how Jerome Powell explained the move in a press conference that day. At least that’s how they explained the action on TV that evening.
In reality the stock market was setup to sell the news anyway, because it was extremely overbought in July going into that Fed meeting in regards to various technical analysis indicators.
It’s daily stochastics were above 80 and its RSI indicator had hit 70 – which is an extremely high level for RSI and almost always leads to pullback.
Now at this moment the daily stochastics are above 80, but the RSI is not above 70. So if the market does sell the news today after the Fed announcement I would not expect the type of drop down that played out last time to hit the markets again.
I would not look for a dive down to 2850 to start from here.
Yes the market could easily have some profit taking as it is near the highs and is overbought on the daily stochastics and the Federal Reserve is likely to disappoint those looking for rapid rate cuts to zero.
Since the market dipped in August the stock market has come back and the bond market has sold off from its recent highs. This has caused Treasury yields to tick up a bet and the expectations for future interest rate cuts to diminish for the Fed fund futures markets.
Right now at this moment they only have a 50% chance of a rate cut today!
The current target rate is 200-225. Now I expect the Fed to lower rates so I am not worried that this is at 50%. More important though is the expectations for the rest of the year.
A few weeks ago the Fed funds market saw a certain chance of two rate cuts by the end of the year and a good chance for three.
Now they really only have one pegged in for sure and a 43% chance of another one after today before the end of the year.
To navigate that when Jerome Powell speaks today he will not make promises of future certain rate cuts to come, but will instead talk out of all sides of his mouth and talk about watching incoming data.
That may make some people angry and make some people sell their stocks, but it’s already known before the market opens today that this is what he is going to have to do.
We know it!
Others know it!
So those that sell in anger over what Powell might say today will be doing so on pure emotion and nothing else. That happens to people who get on big leverage after something goes up a lot.
The reality is that if the market sees some profit taking from here once that profit taking is over people will shift their hopes on the possibility of an October trade truce between Trump and Xi like they did last December that will help the President put this issue to the side ahead of the 2020 election.
Some traders will buy such a dip to position themselves for October.
And if we don’t see some profit taking and the market goes up then they will end up chasing the action.
Today is not going to be a game changer for the markets no matter what they do after the Fed meeting.
The rules remain the same – buy dips on sectors and stocks trading above their 200-day moving averages and sell ones below them. As I pointed out yesterday ACB is one such lagging stock and is acting so bad because it is below this key indicator while KL is one such stock I own that is above it’s 200-day moving average.
And ACB fell another 3.3% on Tuesday while KL went up 4.34% to show us once again how this works. And wait to you get my next big stock pick!
Let’s see how things shake out today. Federal Reserve days are often prone to fake out moves. I like to let the dust settle a day or two before making new trades. That’s why I plan on talking with Ike Iossif of marketviews.tv again on Friday to see what his money flow indicators are now telling him about the markets.
In case you missed it I also posted up an interview I did with David Skarica to get his updated views on the markets on Monday.
To listen to it click here.