Market Lab Report - Premarket Pulse 10/17/16

Published : October 17 2016 at 9:33 ET

Major averages closed Friday near intraday lows, roughly break even, on lower volume after gapping up sharply at the open. This resulted in reversals in all of the major indexes as the NASDAQ Composite reversed at its 50-day moving average while the S&P 500, which is well below its own 50-day line, reversed at the prior late August and early September lows.

Precious metals ETFs GLD and GDX as well as 20-year bond ETF TLT broke below their 200-day moving averages despite the dovish speech Fed Chair Yellen made Friday.

Yellen said it may be wise to run a “high pressure” economy with a tight labor market to reverse some of the negative effects of the Great Recession. Thomas Simons, an economist at Jefferies, said Yellen’s comments “show she is willing to let inflation run a little bit higher than [2%] target for a time and that the Fed is going to err on the side of being a little too slow in [raising rates] rather than too fast.”

Markets responded at first in a mildly bullish manner as it suggests rate hikes later than sooner, then sold off to finish near their intraday lows, perhaps telegraphing that Yellen's words are becoming less meaningful by the month.

Indeed, central banks have no choice but to continue to print money, despite the talk about hiking rates. Based on history, the Federal Reserve hiked prematurely in 1929, 1931, 1987, and 1999-2000 all causing major record-setting crashes. After a prolonged period of no rate hikes, it often just took one or two hikes to burst the bubble. When the Fed hikes again for the second time since 2006, and futures are predicting 70% chance of a hike this December, history suggests the bubble could burst. That said, the Fed will do whatever they can to prevent the undoing of what QE has done since 2009: the making of a manipulated stock bull market that is now finishing its 8th year. In human terms, that is equivalent to the age of an 85-year old man.

On the Federal Reserve front, Fed Vice Chairman Stanley Fischer is slated to speak at noon ET. Fischer has said he is in support of hiking rates soon.


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