Major averages fell on mixed volume closing roughly midbar. Support came in late in the day. Nevertheless, futures are lower by almost 1% as investors digest yesterday's rate hike and the accompanying hawkish policy statement. "Three steps and a stumble" refers to the Fed hiking rates three times in a row which can induce bear markets. The Fed has hiked rates four times in a row plus will be reducing their balance sheet, a double whammy of sorts. Further, The Washington Post reported that special counsel Robert Mueller III is investigating President Trump for obstruction of justice.
The Federal Reserve on Wednesday lifted its benchmark interest rate to between 1% and 1.25%, stuck to plans for one more rate hike in 2017 and said starting “this year” it would gradually shrink its massive $4.5 trillion balance sheet by a starting amount of $10 billion per month until it reaches $50 billion per month. Even at their indicated maximum, it would take a year to reduce the balance sheet by a mere $600 billion, or 13% of the $4.5 trillion total.
Meanwhile, a Bank of America report over the weekend said there have been no signs of QE slowing as global central banks have bought $1.5 trillion in assets this year alone, pushing the global total to $15.1 trillion. At this pace, asset purchases could reach $3.6 trillion in 2017, which is about half of all asset purchases conducted over the past 5 years. But central banks' hands are tied. Bond fund legend Bill Gross has written much on this troubling sovereign debt bubble issue as these bubbles will burst if the pace of QE slows without an accompanying sufficient economic recovery. Indeed, the yield curve has been flattening which is one step from an inversion which often telegraphs bear markets.
So while the Fed plans to hike once more this year, they would be foolish to do so should jobs data and GDP growth both continue to languish. In times past, when interest rates were higher, they would be doing the exact opposite to spur economic growth. But as we have written, the fuel in the interest rate tank is still very low at 1% to 1.25%, so this is no longer an option.
As the US Federal Reserve reduces its balance sheet, other central banks may have to pick up the slack. The European Central Bank at its recent meeting made no indication they will be slowing their pace of QE anytime soon as global economic growth remains tepid. Such a steep reduction in interest rates since 2008 should have spurred far greater economic growth. As Alan Greenspan, Jim Rogers, and Ed Seykota have all said, these are unprecedented times. Global debt of this magnitude has historically has a calamitous ending. To quote a statement Greenspan made last year, "This cannot end well."
That said, bubbles often grow well beyond even the most liberal expectations before finally bursting, so the key to sidestepping any massive correction is to keep a close eye on the price/volume action of your stocks. Markets have always left price/volume clues ahead of such major events.
Unsurprisingly, there was almost no movement in the so-called dot plot, which shows the Fed just isn’t rattled about the recent soft economic readings. They really have no headroom to show they are rattled, thus must maintain a brave face. Historically, rate hikes have induced bear markets. This time, such a scenario seems practically unavoidable.
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AAOI is pulling down towards its 50-dma and the top of its prior base. It must hold support at these levels to remain viable.
AMZN has rallied into its 20-dema where it ran into resistance yesterday. The 50-dma remain the maximum downside selling guide.
ANET is holding along its 20-dema. The 50-dma remains your maximum selling guide although a violation of the 20-dema would in our view be enough to trigger a sell signal.
FB has bounced up into its 10-dma and 20-dema where it ran into resistance yesterday on increased selling volume. The 50-dma remains the maximum downside selling guide for the stock.
LITE is attempting to stabilize along its 10-dma as volume declines, but we would not be surprised to see the stock test the 20-dema, which we would use as our maximum downside selling guide.
NOW is sitting underneath its 20-dema but is holding above the $100 Century Mark, which can be used as a selling guide.
NVDA is holding support at its 10-dma, but came under severe selling last Friday on a big outside reversal to the downside on very heavy volume. We would use the 10-dma as a tight selling guide as the stock may have put in a near-term top.