On Friday, the DOW rallied over 700 points and a lot of people came out to once again predict a Federal Reserve “pivot.” The Wall Street Journal did an article saying that Federal Reserve officials would consider making the size of future rate hikes smaller at their next meeting, at which they are expected to do another 75 point rate hike. Bull market gurus seized on that story to talk about a coming new bull market with a less hawkish Fed, but this news was actually nothing new.
They may be correct in the sense that the stock market could rally more. That’s the good news, the bad news is that nothing has really changed with this Wall Street Journal story. Before the story came out the Fed Fund futures were looking for a 50 rate point hike in December anyway and the pace of rate hikes still shows the Federal Funds rate going to 5% next year. The TLT bond ETF, even made a new low on Friday, showing that Fed pivot hopes are nonsense.
I suggest you read the complete Wall Street Journal article yourself to see what it really says, because it is much different from what you may have been told. You can find it here.
The article points out that the officials actually have no problem with the bear market. It reads, “Fed officials want higher borrowing costs and lower asset prices to slow economic activity by curbing spending, hiring and investment. They expect that to reduce demand and lower inflation over time.”
It also says that, “If officials are entertaining a half-point rate rise in December, they would want to prepare investors for that decision in the weeks after their Nov. 1-2 meeting without prompting another sustained rally.”
Apparently, they did not like the stock market rally that took place from mid-June to mid-August and all of the pivot talk that surrounded it and don’t want something like that to happen again. “One possible solution would be for Fed officials to approve a half-point increase in December, while using their new economic projections to show they might lift rates somewhat higher in 2023 than they projected last month,” explains the article.
So, the idea promoted by market gurus and commentators that the Federal Reserve is about to become a friend to investors is pretty much nonsensical. It’s simply people delivering to their audiences what they want to hear, and perhaps convincing themselves of what they want to believe too.
The bear market is not ending here.
Now the stock market, could have an end of the year bear market rally.
If it does it would be technical in nature, and that means it needs a price close on the market averages above recent resistance levels.
That means a close above 3800 on the SPX, which is the high of the current short-term range it has been trading in for almost a month now.
I have no opinion myself on whether it will actually be able to close above 3800 here. It could just as well keep chopping around and then start to decline again. That’s the difficulty in playing for rallies in a bear market.
And where would you get out if it does rally?
Above 3800 resistance on the S&P 500 is at the 50-day moving average around 3900, and more importantly at the 1/3 retracement level of the October low and all time high and its 150-day moving average, both of which are around 4000.
I would expect any rally to peak out around there, just as the August one ended between the 150 and 200-day moving averages.
As far as Friday’s rally, it actually was caused more by Japanese Central Bank intervention to stop the Yen from falling then Federal Reserve news, which was none news.
Check out the FXY yen ETF.
The Japanese Central Bank did an intervention about a month ago that only work for two weeks.
If the stock market were to rally it’d also get overbought in terms of various technical indicators, such as the daily stochastics, to make for a good place to take some money off the table or even to bet against weak stocks in weak sectors. Maybe such a rally would last into Thanksgiving.
If we are going to get an end of the year rally it will probably start early with such a rally, because everyone is hungry to try to play one.
We’ll see.
I’m not looking to try to buy for it, I’m more interesting in buying when the bear market is really close to being over with.
Playing a rally now means playing a counter-trend move in a bear market.
That’s what everyone actively trading the markets has been trying to do all year and getting their head handed to them, because that is a very hard game to play.
The reality is the Federal Reserve has no problem with the bear market in the stock market, so is not going to take any action to stop it now. I’m not doing much in the markets now and really am looking at the market action only a few times a week.
-Mike
