Market Lab Report - Premarket Pulse 9/12/16
Major averages had one of their worst showings since the Brexit sell-off on Friday, as selling volume ballooned. The NASDAQ Composite, S&P 500, and Dow Industrials all closed below their prior periods of consolidation with both the S&P 500 and Dow Industrials closing well below their 50-day moving averages while the NASDAQ Composite closed just below its own 50-day moving line.
Bonds also had a steep drop as Fed President Eric Rosengren turned hawkish saying the US central bank could resume gradual rate hikes as the risks facing the economy are more in balance. This was followed by the Fed's Daniel Tarullo saying there is no need to raise interest rates 'right now' but remains open to the possibility of a rate hike later this year. That said, Tarullo ultimately disagreed with Rosengren as to the timing and reasons behind the hike. Tarullo feels we are nowhere near the Fed's 2% inflation target, thus feels there is little risk from frothy asset prices. Nevertheless, the view that rates could get hiked sooner than later ruled the day.
The tug-o-war between "to hike or not to hike" continues as quantitative easing pours into markets on all fronts. That said, the European Central Bank's recent decision not to extend its monthly asset-buying program beyond the end of March 2017 disappointed markets though it remains open to such an extension.
When the Fed decides on September 21, we could have a replay of September 17, 2015 when the Fed decided to not hike rates due to global economic woes. The markets reacted by having a high volume reversal on that very day, followed by several days of sharp declines. When the rate hike finally came on December 16, 2015, the markets rallied that day finishing nicely higher then sharply corrected over the next two trading days. So elevated periods of volatility may occur in the coming weeks should the rate hike war intensify.
Will the market see any Fed decision when they meet later this month as the glass being half-empty? If so and the Fed hikes, the markets could interpret it as too soon and sell off. If the Fed does not hike, but mentions that a hike should happen, data willing, before the end of the year, the markets could also sell off as markets dislike uncertainty as well as the implications of less liquidity for stocks.
The probability of a rate tightening when the Fed meets later this month rose to 27% on Friday, from 18% on Thursday, following Rosengren’s comments according to the CME’s Fed Watch Tool.
Economic reports leading up to the Fed meetings in September, November, and December are likely to be watched like a "hawk".
But instead of trying to anticipate what will happen, it is always best to focus on the price/volume action of your stocks and let them tell you when to buy and when to sell in alignment with your risk tolerance profile and trading personality. Keep stops tight as always. And we will continue to provide updates on actionable stocks as well as updates on stocks on our Focus List.
Fed Gov. Lael Brainard will speak today at 1:15 p.m. ET. Her speech will be the last before the Fed’s “quiet period” begins Tuesday, ahead of the central bank’s Sept. 20-21 meeting. Markets will watch to hear whether Brainard will shift from her dovish stance on policy.
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