Post FOMC price levels; the Week Ahead; and Secret Sauce Indicators. Plus: new Macro-To-Micro Options Power Hour for CLUB/EDGE members starts Wed Sept 25th!
Topics Covered in this CLUB/EDGE client post posted Sunday Sept 22nd:
Market timing calls - which worked/which didn't + why.
About that gold move...
Cutting at all-time highs: Is it 2007, 1995 or 1970s-like?
POLICY INTERFERENCE PAYS!
My critical levels to hold in yields, oil & FX to keep rally in play.
Exactly where I would turn bond bear again.
The week ahead - trading economic data, earnings + OpEx on Sept 30th.
My key sector rotation and index/sector/stock price targets.
My updated call on value & growth rotation.
NEW: Macro-to-Micro Options Power Hour Webinar on Wednesdays!
Two Out Of Three Ain't Bad
Wednesday happened (Fed Day) - and you had a detailed morning note, a detailed evening note, and three live webinars throughout the day by yours truly, so hope that helped you navigate an eventful end-of-week!
Good or Lucky, I ended up being mostly right - and mostly for the right reasons
1. I warned that I expected a bond pullback:
"Time For Yield Spike"
2. I warned that as TLT pulled back, I expected yen and gold to follow:
"where yields go, DXY will follow. This would actually be a bearish move (short-term) for precious metals (gold/silver) with yen and bonds."
3. And I doubled down (again) on my higher equities call:
Now let's see how my "One More High" in equities does into election.
Then Thursday, equities gapped higher, precious metals started their next leg up, while bonds & yen continued their fall.
About that gold move...
Day of FOMC, I made the above UNUSUAL call that gold would pull back instead of spike higher - like it (almost) ALWAYS does on Fed Days.
Well, it moved up 1% on the 50bp rate cut announcement, then tanked 2%, ending the day down -1%.
So the call for higher equities, yield spike and falling yen worked - but gold didn't stay down.
I'm going with the assumption that gold/silver got a double bid: on inflation risk (from loose monetary easing) AND recession risk (from labor market weakness fears)... even though Powell positioned these surprise double rate cuts as "normalization", a "victory", "a commitment not to get behind, a "recalibration" (that last expression CNBC says he used seven times).
Early morning Thursday (6:27 AM ET), JPM sent out this algo-triggering bullish stat:
"Over the past 40 years, the Fed has cut rates 12 times when the S&P 500 $SPY was within 1% of an all-time high. The market was higher a year later all 12 times, with an average return of around 15%."
The Big Cut spin triggered Wall Street into a stampeding narrative flip - the resurgence of "1995-like" for stocks to "1970s-like" for inflation.
MarketWatch featured Dario Perkins, managing director for global macro at TS Lombard, who said he never doubted Fed Chair Jerome Powell’s ability to sell a half percentage point rate cut more as a victory lap in its fight against inflation than a warning that the U.S. economy was about to implode.
He says a 1995-like outcome is now back in play, for the economy and the market!
And with that backdrop, the bullish 10Y2Y yield curve bear steepener triggered bullish for risk assets.
So much so that banks moved strongly higher while the mantra for bullish commodities & emerging markets on falling dollar started to get front-run.
But the biggest move was in equities, as the 50/50 bet on .50 rate cut meant MANY puts had to be closed and higher gamma calls needed to be bought/chased.
And with that, the DIA & SPY made new all-time-highs while IWM & QQQ made it back to August highs.
I see it much more akin to 2007 as Fed cut into all-time-highs right before negative GDP prints hit in 2008.
History DOES rhyme. On 9/7/07 the Aug NFP was weak & Jul+Jun were revised lower (sound familiar?) The market fell 1.5% that Friday. Dipped a bit more the following Monday then rallied from 9/11/07 into the FED pivot on 9/18/07 when they did the first rate cut in 4 yrs (50bp). @market_sleuth
Before we get tooooo carried away, keep in mind this CORE FACT: Without POLICY INTERFERENCE, the market would be toast.
Consider for a moment that I literally detailed for clients September 10th - Trouble In Paradise- that we "NEED a bullish macro trigger pronto".
I gave KEY levels for 10Y yields, crude oil & USDJPY that needed to get defended to be bullish for “One More High”.
*THEY* can't let yields & oil & usdjpy fall too much. AND most definitely not before the election.
Well... we got our macro bullish trigger with FOMC Wednesday!
Then two days later (Friday):
Layoffs soared in August, hitting their highest total in 15 years, while year-to-date hiring hit the lowest in 19 years of a Challenge, Gray & Christmas survey. — @UnusualWhales
Is there any wonder why Fed took out the big guns at FOMC Wednesday?
Fed cuts don't cause recession. Contraction in employment does.
THIS is their major worry - besides Harris losing to Trump - and why Powell forced a "recalibration" despite not having majority decision from the FOMC board.
Powell was pretty adamant about this big cut despite lone dissenter, Bowman. Rare given Powell said this was a core belief as Fed chair - unanimous consent - and that a Fed governor hasn’t dissented in close to 20 years!
So either they know something about the weak employment picture OR they are being politically expedient weeks before a contentious election.
Either way, the Fed funds rate will now start to closely track the two-year Treasury yield, which is 3.6% when FFR is 4.8%.
Translation: Fed has more to go. And it likely means the economy could become weaker than it looks now.
But for now, for the first time in four-and-a-half years, Fed cut and Wall Street loved the news.
SPX is up nearly 40% since the November 1st Fed Pause & Yellen Yahtzee. Amazing if you think about it.
Zooming out, let me show you what it looks like on a chart. Not the chart of DIA with its large cap behemoths leading the market higher or the NDX 100 or SPX with its massive cap-weighting behemoths of the MAG7 - 10.
No, let's look at ignored, battered NYSE with its 2000 companies, where at least 40% are unprofitable zombies.
POLICY INTERFERENCE PAYS!
And with that, real price discovery is not allowed during a period of MONETARY & FISCAL DOMINANCE.
But it also heightens the risk that repeated policy interference has a diminishing rate of return.
In the meantime, this 'green light' creates a bullish backdrop for my "ONE MORE HIGH" thesis.
That is because: TOPS ARE A PROCESS & BOTTOMS ARE AN EVENT.
You just got a nice 'event'. Enjoy it while it lasts. We have time to sell stocks when payrolls turn negative.
