I got several emails from people about the market moves after the Fed rate cut decision yesterday. At one point the DOW fell over 400 points yesterday and gold fell when the people emailing me expect it to rally after the meeting.
Before yesterday’s I open I sent you an email basically pleading for you not to draw much meaning from a daily Fed day gyration as they are typified by fake moves that end up not meaning anything.
Why the gyrations?
One simple reason is that this has been the most anticipated rate cut we have ever seen so traders and computer robots have had seven months to buy into it for a buy the rumor sell the news play.
But there is also computer positioning in the bond markets, currency markets, and futures markets that just makes things move kinda crazy for a few hours after an FOMC statement and sometimes even the next day until the real meaningful trends asserts itself.
On Sunday I did a private Power Investor post saying that I was not expecting a big gold rally this week. The reason was something to do with how the metals complex was setup. That info is for private members only.
What I’m most interested in at this second is to see how the S&P 500 and Russell 2000 now act as both have seen the volatility in them collapse into the meeting.
Take a look at the 20-day Bollinger Bands for the S&P 500.
Notice how the 20-day Bollinger Bands have now come so close together that they are setup to expand. If I looked at nothing but this chart I’d think that the S&P 500 was setting itself up to have a quick expansion of volatility with a quick pullback down to the 2850 area where its 150-day moving average is at.
But this is not a normal market as it is one defined by share buybacks and computer trading and in the past few years a collapse in volatility like this almost every August has only led to drifting action for a few weeks in which the market basically just floats around.
So if by Friday the market is about where it is now then you can expect the market to just float for several weeks probably into Labor Day.
And that means today I’ll be looking to see if there is any real meaningful follow through with yesterday’s selling.
No follow through will set the stage for a new big August stock pick for you next week too!
And as I said yesterday, I think the key thing to do is not wonder about why the market moved for a few hours yesterday in a wild swing, but to instead ask yourself what are the long-term implications for the new monetary cycle that began Wednesday?
The Fed Fund futures this morning are projecting an almost certain second rate before year end and likely third one and a twenty percent chance of four by April 2020. A two and pause scenario seems most likely to me. Powell has turned himself into a prisoner of market expectations.
-Mike
