Did the FED just Blink? | Thursday, August 20

janet yellenDid the FED just Blink?

The FED had the mindset of financial markets right where they wanted it…..that is until 2:00 PM; excuse me, until 1:35 PM yesterday afternoon.

FED Chair Yellen has been lecturing markets for months that the path of rate hikes would be very gradual and we should focus much more on the “pace” of interest rate hikes, not the timing of the initial hike.    OK, the market has not only bought into that, but also has discounted the inevitability of an initial rate hike and really wants to get beyond it ASAP.

Even the Electric Utilities have embraced the inevitable initial rate hike.  the sector has rallied 10% this quarter off the late June lows and much of that rally has taken place while the probability of a September rate hike increased from 25% to 60%.   Now the FED has blinked.

The market doesn’t like and won’t like it going forward absent some clarification from FED speak the next couple weeks.   Despite an initial “knee jerk” rally, markets faded badly to levels they were at pre the FED minutes and look decidedly lower this morning.

The FED seems “frozen” in mentality of inflation targeting and market coddling.   It might be in all parties best interest to rethink both of these.

Wednesday recap:  Wednesday’s trading in equities was not for the faint of heart as stocks had went on a wild ride reminiscent of riding “The Zipper” as a kid at the amusement part on a hot August afternoon.  The day began decidedly to the downside as investors were looking at nothing but negatives to start the day.

First, Oil began the day weak and got  considerably weaker after the inventory report at 10:30 showed near record global supply, as fringe producers have undeterred by price points below $50 for both WTI and Brent Crude.  Of course economists will beat on us relentlessly that plunging oil prices are a big positive for the US economy and particularly consumer spending, it brings into question how many PhD Economists are invested in the  stock market.

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Secondly, The China Stock Market continues to adjust to a third of their stocks  coming off trading suspension as well as restrictions being lifted on margin accounts and short selling earlier in the week.  The Shanghai Index was down 5% before finance authorities intervened, after which stocks reversed to finish with gains just shy of 2%. While that gave us a marker of 3500 on the Shanghai Composite to look for government support on any further sell offs, it also signaled  that last week’s devaluation of the Yuan is not a short term fix for the Chinese economy or their stock market.

Two hours into the day, Major Market averages had losses of -1% to -1.5%, the S&P 500 was breaking below its 200 day moving average, the Russell 2000 was below the critical 1200 level, and Esteemed Market Technicians were “tweeting” on the potential of a “Dow Theory” bear market signal from the DJIA:

“The 17,068.87 level represents the Dow’s closing low made on 12/16/14. If broken on a closing basis it would flash a Dow Theory bear market.”

Then the real fun began!!   First we had a recovery rally on the “rumor” that the July FOMC minutes had been leaked.  Then we had the reality that the minutes had been released 25 minutes early on the Federal Reserve website.  This kicked the rally into second gear as the minutes were more dovish than expected, although not without conflicting statements.

By 2:15 PM market averages were almost back to flat on the day, having made up the majority of this move in the 45 minutes following the release of the FED minutes, which mysteriously were released on their website 25 minutes ahead of schedule.

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I’m expecting the Conspiracy Theorists and FED haters will have a field day with the premature release of the FED minutes.  Talk about a “fat pitch” right down the middle for the guys at Zero Hedge!!    We’ve heard it dozens and dozens of times.  “The FED is ‘data dependant’ and their most important piece of data is the last sale on the S&P 500”  not to mention the “Plunge Protection” team,  and of course the often whispered about but never to be discussed seriously “secret account” where the FED buys S&P futures when the market is at risk of “God forbid” a healthy correction.

The Early Line:  S&P 500 futures are 12 to 15 handles lower in very early trading.  If this holds the S&P 500 will open 10+ points below its 200 day MA and possibly set up a test of the 2060 – 65 support level from the intraday lows on Monday and yesterday.

Keep in mind the Jackson Hole conference  is next week and Central Bankers will have a “heavy lift” to appease all the hot button topics from inflation to liquidity to currencies just to name a few.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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