Market Lab Report - Premarket Pulse 6/16/16 - Is the Fed becoming schizophrantic?
Major averages closed down, reversing course on lower volume as they finished near the lows of their respective trading ranges. The NASDAQ Composite, S&P 500, and Dow Industrials are once again under their 50-day moving averages. Only the small cap Russell 2000 which has been showing relative strength in recent weeks still remains above its 50-day line.
Federal Reserve officials on Wednesday held interest rates steady while noting that economic data over the last six weeks had been mixed. On the downside, Fed officials noted that job gains had diminished and business fixed investment had been "soft." but they were not all downbeat, noting that economic growth "appears to have picked up." Their dot plot suggested one rate hike in 2016, down from two rate hikes, implying heightened concerns regarding the global economy and suggesting central banks are losing their grip, not that they had any to begin with, since QE is based on flawed premises. Yellen mentioned Brexit remains a concern but the outcome is unknown.
The 20+ year treasury bond ETF (TLT) is close to breaking out to new highs, as the market has been anticipating lower rates since the financial meltdown in 2008. This comes as no surprise as central banks have cut interest rates more than 640 times and have purchased about $12.5 trillion dollars in assets since then.
The sovereign debt crisis is upon us as it is widely believed that the only thing central banks can do at this point is print more money which will push rates even lower. The total value of bonds with negative yields now exceeds $8 trillion as the 10-year German bund yesterday went negative for the first time in its history. Indeed, central banks including the US Federal Reserve seem to be transforming from schizophrenic to schizophrantic as the global Titanic is too large to avert the "Iceberg ahead!"
But that does not mean a crash is coming tomorrow. QE can push the strongest markets higher for much longer than expected, and Yellen has said she is not opposed to joining the NIRP party. Look how far the US stock market has come since 2009 when QE began, though the stock market, too, may be running out of steam as it meets with a crisis in confidence.
So while the world may witness further sharp setbacks as we've seen since last August which has scored several fast +15% or greater gains for the VIX Volatility Model, it does not rule out the chance of US markets moving well beyond old highs.
That said, numerous issues, too many to mention, remain. Global growth continues to suffer, the jobless rate is far greater than what is reported, pensions are under threat, governments are bankrupt, student loans totaling $1.3 trillion have been criminalized for non-payment, most families live paycheck to paycheck, and 1 out of 5 families in the US are food challenged. Meanwhile, the near record levels in US equities give a false sense of security than things are not so bad. Former Fed Chair Alan Greenspan recently said in a recent interview that while Venezuela is on the verge of marshal law, the US, UK, and European countries could eventually follow suit at some point since the massive debt load is interconnected. He said we were able to recover relatively quickly from situations such as the dot.com
bubble and the stock market crash of 1987 because the toxic assets during those periods were not funded by debt, so there was very little leverage, unlike today where everything is maximally leveraged, which can collapse the structure of an economy.
Over in Britain, should the UK exit the EU when voting takes place June 23, it will probably cause short-term shocks across markets which could be buying opportunities in US stocks, since QE remains on full bore. That said, it could push the European markets into deeper recession which could spill over into US markets, though as we have said, QE is a formidable opponent in helping to push the US markets higher, as it remains the tallest standing midget so attracts QE-based capital from other countries. Indeed, European markets have been in a slump since mid-2014, trading about 1/3 off those highs while the US markets trade close to all-time highs.
We continue to keep a close eye on our ever evolving list of key stocks as they shine the light down these dark, twisty corridors that make up this market maze. Taking profits in context with the stock's chart and keeping stops tight has continued to work, and helps one sharpen their trading dexterity as well as keeping greed in check.
Tesla Motors (TSLA) is reinstated as a short-sale set-up. The stock has recently failed at its 50-day moving average and has moved below its 200-day moving average at 221.12. This puts the stock in a shortable position using the 200-day line as a guide for an upside stop.
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