Last weekend I made note of the fact that the S&P 500 and other market averages were having a classic Bollinger Band squeeze and that this would likely result in a big swing in the market, likely to the upside. That didn’t start, though, until Friday, when the S&P 500 rallied hard to close above its upper 20-day Bollinger Band. That resulted in a new 52-week high in the market and completed the squeeze pattern. It may have taken a few days more than I expected for the pattern to complete, but now the market is set up good for another move up.
All we saw was a mere pause in the market rally in the first half of January.
Check out a chart of the S&P 500.
The market dipped on Tuesday and Wednesday last week as economic data came out that showed that consumer spending is continuing to do well, and CPI numbers were released that showed that inflation is not really going anyway. A minor Federal Reserve official came out, as a result, and said that there is no real reason to lower interest rates this year.
All this diminished the odds of a Federal Reserve rate cut in March to now near 50/50, even though they remain at near 100% for one happening in May, with the Fed fund futures, and that gave justification for the market dipping early last week.
But, the market finished the week up to defy the doubters and the Fed is still set to lower rates this year – what difference does it make if they do this in March or May?
The reality is this one minor Federal Reserve official is correct – THERE IS NO JUSTIFIED REASON FOR THE FED TO LOWER INTEREST RATES.
There just is not when there is no evidence of rising unemployment or a recession – and certainly not when the CPI remains above 3%.
Really interest rates should not be lowered with unemployment this low as long as CPI is above 2%!
The WSJ has a story this weekend with this paragraph – “The Atlanta Fed’s GDPNow model shows the economy likely grew at a 2.4% inflation-adjusted pace in the fourth quarter. That is nowhere near the conditions that have historically necessitated rates coming down 1.5 percentage points—which traders were betting on heading into 2024.”
Lowering interest rates now is ridiculous!
But, this is an election year and the Federal Reserve knows that falling stock prices could anger the public and it wants to keep the public happy – as that will keep the President happy. Low rates drives people to buy to speculate, even on crypto, and that helps the stock market look good.
That is the only reason I can think of for the Federal Reserve to prep for lower rates at this junction, because the risk is if they lower rates before there are signs of a recession they will abort their fight against inflation before it is even won.
The problem is that these type of policies pose a long-term risk to the US dollar index, which has been slowly coming down since the Federal Reserve pivoted to this dovish talk in November.
But, no one in the financial media seems to care, because I see no one pushing back.
You can see that the US dollar index chart has started to form a downtrend channel.
It’s at the top of the channel so that makes now a time that it might be worth considering buying investments that benefit from a falling US dollar.
At the top of that list, of course, is gold, even if it isn’t likely to make new highs and really run until the first Federal Reserve interest rate cut.
Gold historically goes up when the US dollar goes down.
Gold has come down off of its recent high in the past few weeks about 75 points.
The indicator on the bottom of this chart measures the price relationship between gold and the US dollar index.
When it is down at -1 it means that the two are trading totally opposite to one another step by step.
If it is at +1 it means they trade perfectly with each other.
Some people buy foreign currencies – or trade FOREX – to benefit from a falling US dollar index.
I don’t do that, but I’m considering putting a portion of my bond/CD investment allocation into foreign bonds as another way to do essentially the same thing while getting nice interest too.
There are a few ETF’s that allow you to buy foreign debt in the local nations currency.
Two are ETF’s EBND and ELMC.
Here for example is EBND.
Notice how the correlation indicator is closer to -1 than even the price of gold has been in the past few years.
This ETF is likely to go down if the US dollar index goes up and up when it goes down.
I’m considering these type of ETF’s and you may want to look into them yourself or talk to an investment advisor about them.
-Mike
