Markets May Be Setting Up For A Move Lower
Hale Stewart | Mar 21, 2019 02:26AM ET
- The Fed left rates unchanged.
- Brexit will come down to the wire; a hard Brexit option is still a possibility.
- It's looking like the markets are setting up for a move lower.
In a policy move that surprised absolutely no one, the Fed left rates unchanged. Let's look at a few key lines from the policy announcement:
- The Fed specifically noted weaker growth: "... the growth of economic activity has slowed from its solid rate in the fourth quarter.... growth of economic activity has slowed from its solid rate in the fourth quarter."
- Price pressures are weaker: "On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent."
- The Fed is looking at international developments: "In light of global economic and financial developments and muted inflation pressures..."
- Incoming data is key: "... the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information."
- The Fed has a favorite new word: patient.
Most importantly, the new dot plot strongly implies there won't be any more rate increases this year.
Brexit will come down to the wire. As of this writing, May has asked the EU for an extension until June 30. The EU responded that they will either grant a shorter (May 23) or very long extension. For the latter option, the EU would also need assurances of a new political process in the UK. At this point, it's possible that we'll see a hard Brexit (a no-deal crash out of the EU) at the end of next week. If that happens, the global economy will experience a tremendous shock that will cause at least one if not several unintended consequences.
James Picerno who runs one of my favorite sites, Capital Spectator, put together a compilation of Q1 2019 GDP projections for the US:
Right now, the median projection for Q1 GDP is 1.4%, which is in line with the weak Q1 GDP growth we've seen throughout this expansion.
Let's think about what we learned today from the Fed. They said they would be "patient". The accompanying dot plot strongly implied that there wouldn't be any more rate increases. That's the good news - and it should have sent the market higher. But the Fed also noted that economic growth is slower while also noting that they expected somewhat slower growth in household and business spending. That's the cue the markets took.
Get The News You Want
The SPY opened modestly lower, drifting lower still until the Fed announcement. Prices quickly spiked as prices moved just above yesterday's close. They made a second advance but then fell to the levels from just after the Fed announcement. This formed the right shoulder of a head and shoulders pattern. Prices then fell below yesterday's close, ending the day slightly lower.
The IWM didn't even form a right shoulder; instead, it simply fell through yesterday's close. In addition, prices dropped a bit right at the end.
The mid-caps pattern follows that of the IWM.
And then we have the this: The 10-year Treasury had its biggest rally since January 2018 - which is a very defensive move.
The IWM daily chart is still weak. Prices are entangled in the shorter EMAs - which are moving sideways. Momentum is dropping.
The IEF is now at the highest level in six months.
While the TLT is near a 6-month high.
So, the riskier indexes fell and the Treasury market rallied. All this in reaction to a central bank that pretty much said they won't be hiking rates again this year. My trading instincts are telling me that the market is setting up for a move lower.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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