Major market indexes tested their recent lows on Friday after a spectacular two-day display of bi-polar price action on Wednesday and Thursday. On Wednesday, after the Fed meeting, the market keyed on Fed Chair Jerome Powell's comments that 75-basis point increase rate increases were "off the table" in expectation of a "softish landing," as he put it. That was enough to set off a massive short-covering rally on Wednesday that then completely reversed on Thursday as the S&P 500 and NASDAQ Composite Indexes reversed at their 20-day exponential moving averages. The indexes are now roughly back to where they were before the Fed policy announcement on Wednesday, but remain in downtrends as the general market remains quite weak underneath the surface, among individual stocks.Short-sale target Visa (V), on which we reported as a short the prior week as it ran into its 200-day moving average, triggered another short-sale entry on Thursday. This time the trigger was a break back below the 50-day moving average. V then pulled a U&R cover signal on Friday as it undercut the prior late April low and rallied back above it. This may not last long, however, but we would certainly be open to any rallies back up towards moving average from here as potential opportunistic short-sale entries if they occur.
We remain cautionary on the market as many stocks and groups continue to make lower lows. While the indexes ended the week near their lows for the year, and could certainly rally off near-term price support, the odds of lower lows over time remain high enough to keep us on the sidelines for now.
The Market Direction Model (MDM) switched to a CASH signal on Wednesday, May 4th. Powell's words soothed markets so could create a period of chop and slop or even another dead cat bounce here; best to take profits. The overall downtrend most likely remains intact so the MDM will be looking to re-enter on a possible dead cat bounce as Powell remains hawkish, but did say he does not see a 75 bps rate hike on the table and thinks inflation may flatten along with some evidence of a peaking core PCE. In the coming weeks to months, should inflation start to flatten, he may use that an excuse to switch back to a dovish position by postponing rate hikes as he did in January 2016. He does not want to cause a deep recession nor tank the markets undoing what 13 years of quantitative easing has done to elevate and enrich the top 1%. Politicians hold dear stakes in stocks, bonds, and real estate. Still, this time, he may have to let the majors drop deeper than the typical -20% correction seen on the NASDAQ Composite and S&P 500 a number of times since 2010 in this Era of QE.