Market Lab Report - Premarket Pulse 10/12/16
Major averages fell yesterday on higher volume as rate hike concerns and nervousness ahead of today's FOMC minutes flared up. A broad number of leading stocks took severe hits including names that have been on the VoSI Focus List, such as ACIA, TWLO, PI, WB, and others. As we wrote over the weekend in our VoSI Focus List review report, the breakdowns in leading stocks at that time were likely a cautionary sign as an indication that things were not right "under the hood" of the market. That said, maintaining a non-biased stance is key so use any market corrections as an opportunity to either short actionable stocks or buy those which are constructively pulling back to logical areas of support.
Alcoa (AA) and Illumina (ILMN) kicked off earnings season with disappointing results which added to the selling pressure. S&P 500 companies are expected to post their sixth straight quarter of declining earnings, according to FactSet data.
At 2:00 PM ET today, the Fed will release their latest FOMC meeting minutes. The Fed will probably wait until after the election to raise rates. CME FedWatch puts the odds at 70% when they meet in December, up from 66% last Friday.
Central banks tend to move together. Indeed, the European Central Bank, Bank of Japan, and Bank of England are coming to realize that negative rates are not working. This will be a nasty wake-up call to stock and bond markets who've become addicted to the QE morphine drip, er, gush. But markets are forward looking so a correction could begin sooner than expected.
When the Fed does hike rates again, it will be the second time they have done so since 2006. This is reminiscent of when the Fed hiked rates prematurely in October and December of 1931 though the bubble had already burst by 1931 as we all know. The Dow Industrials then lost close to half its value from December 1931 to its low in July 1932. Peak-to-trough from the highs set in September 1929, the Dow lost -89.5%.
Today's situation is different and arguably more dire. The Fed's past mistakes in hiking too soon as they did in 1929, 1931, 1987, and 1999-2000 caused some of the largest market corrections in history. Will history repeat? Stay tuned.
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