Market Lab Report - Premarket Pulse 7/6/16
Major averages fell yesterday, closing mid-bar on mixed volume, with the NASDAQ Composite closing just between its 50-day and 200-day moving averages while the S&P 500 got support at its 50-day line. This was not terribly surprising after the markets bounced sharply higher after the Brexit vote. It is a sign of strength the majors were able to recover most of their losses on the bounce then close mid-bar on the pullback.
Brexit will be a major factor in keeping the Fed dovish as many uncertainties remain while other central banks have indicated they will continue to keep the QE-spigot wide open. This should push QE-capital into hard assets including the US stock market which has been the tallest standing midget since the financial crisis of 2008.
The Federal Reserve today at 2 pm ET will release minutes from its meeting on June 14-15. The minutes are expected to focus on the lackluster May jobs report and give an indication of how dovish it will be at coming meetings. Of course, Brexit will be a major factor in keeping the Fed dovish. Expect lower rates ahead both at home and abroad. The ETF TLT which tracks the US Treasury 20+ year index recently hit new price highs, thus hit record low interest rates as did 10-year Treasurys.
In stocks, the real leadership has been among defensive sectors such as consumer staples, utilities, and food which has created a sense of fear over the past year that the markets are exhausted and indeed is indicative of leadership late in a bull cycle. But QE is a major factor and while loss of confidence continues to build, central banks continue to print.
Furthermore, an extended period of defensive-stock leadership occurred in 1988 and 1989 for two full years after the Black Monday crash of October 1987, helping markets hit new highs in 1989.
So despite the defensive posture of stocks, QE can end up pushing markets a lot higher than expected, much as it has since 2009.
But as always, remain fluid by not getting wedded to either a bullish or bearish stance since markets can change on a dime given the news driven environment which can upset the QE-cart in an instant.
The Market Direction Model has been in cash post-Brexit due to potential uncertainties but could switch in an instant, depending on price/volume action.
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