Courtesy of John Nyaradi
Today’s stock market ride felt like a ride on “The Beast,” one of the most famous roller coasters in the world, in King’s Island, Ohio.
Wildintraday swings ended up with a late day gain of 429 on the Dow Jones Industrials as investors tried to figure out how to respond to the Federal Reserve announcement and events around the globe.
While it was a wild ride with a seemingly positive finish, a glance under the hood reveals some troubling developments.
Wall Street Sector Selector remains defensively positioned and we continue to expect lower prices ahead.
Let’s start with the Fed statement:
It was unprecedented in the fact that they put a date on how long they expect to keep interest rates low, now mid 2013. To my knowledge, that has never been done before.
The second thing that pops out is the fact that there were three dissenters, the largest number since 1992, which would indicate a possible fracturing among the Fed members regarding policy going forward.
Finally, and most importantly, the statement was very clearly more dismal than any we’ve seen in recent times and was really a frank admission that things aren’t going too swell.
“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.” (So much for the success of zero interest rates and quantitative easing)
“Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.” (So much for the “soft patch” and second half recovery)
“The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.” (Slower than +0.8% in Q1?)
“Consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” (So this will likely trash the dollar, set the stage for some very powerful future inflation and likely generate some, let’s say, “negative” reaction from China and the emerging world.)
“The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as approropriate.” (Get ready for QE3)
So what is the Fed saying/doing?
The economy is terrible, so terrible that they felt like they had to publicly tie their hands regarding their most potent weapon (interest rates) for two years in an attempt to instill some sort of confidence and stimulate demand and employment growth which just doesn’t seem to be there.
It’s also likely the beginning of another round of easing in response to a slowing economy and recent stock market declines that have completely wiped out the “wealth effect” they’ve been trying to generate for the last two years.
Finally, reading between the lines, recession and recurrence of the threat of deflation is certainly at the forefront of their deliberations. Get Ready for Great Recession 2.0
For all of today’s noise and drama, the technical picture remains unchanged.
Chart courtesy of Stockcharts.com
The market remains oversold and so could move higher over the short term
The S&P 500 (SPY) is about to form a “death cross” wherein the 50 Day Moving Average crossed below the 200 Day Moving Average.
We remain convincingly below the two moving averages which are developing downward slopes as they near their crossover point.
Finally, there’s the bond market.
One would expect that if all was well in equities land and that markets felt the Fed had the situation well in hand, that bond prices would sink as money flowed from safety back into “risk on” assets.
Chart courtesy of www.stockcharts.com
However, today, in the face of a monster rally and the recent credit downgrade by S&P, bond prices rose.
So is the trade now “risk on” as the Dow Jones Industrials would like to tell you, or is it “risk off” as the bond market is saying?
Hang on because the beast is on the move.
Global Market Summary:
Dow Jones Industrials (DIA): +429; +3.9%
S&P 500 (SPY): +53; +4.7%
NASDAQ (QQQ) +124; +5.3%
Russell 2000 (IWM): +45; +6.9%
Tomorrow’s Action:
Tomorrow brings the June Job Openings Report, June Wholesale Inventories and July Budget Deficit.
Have a great evening,
John
Click here to learn more about John’s book and for a free membership to Wall Street Sector Selector
