This market has been ugly since August, but it is starting to get even uglier. And we all know it.
The reason for this latest breakdown in stocks was last week’s Fed Announcement, specifically the decision not to raise rates, which revealed an unconfident Fed and compounded growing global growth worries that started in China, but are now spreading around the globe.
The 5+ year bull market is now at a critical tipping point, and whether this market holds or breaks will depend on the Fed.
Understanding the Fed and its effect on stocks is now more than critically important to client portfolios, because if the Fed does not show some confidence and suggest they are still on pace to raise rates by year end, then this market will likely break in a big way.
So, you need to understand the Fed to protect client portfolios.
We understand the Fed because we spend hours monitoring and analyzing:
- Comments by Fed Governors
- Research Papers from the Fed
- Key Economic data the Fed uses to make policy decision
- Key bond market signals that tell us what the market thinks of the Fed and,
- FOMC Meetings and Official Releases like the FOMC Minutes
We take the time to study the Fed so our subscribers don’t have to.
Our job in tough markets like this is to eliminate the information overload and deliver the unemotional fundamental and technical analysis that can help our paid subscribers reassure clients, protect portfolios and seize opportunities across asset classes:
And we are delivering this macro research each day at 7 AM because as we saw again this morning with global markets plunging, this is a quickly changing landscape and waiting a few days for a macro update from the firm’s CIO or global strategy team simply isn’t going to cut it.
We are now at a critical tipping point in this market and a test of the August spike lows is starting to look inevitable. And again, whether the market breaks down or those lows hold largely depends on the Fed.
We are committed to making sure that our paid subscribers have the timely, accurate Fed analysis they need to:
- Alter broad asset allocations if stocks break down
- Identify and buy hedges to protect portfolios
- Know when it’s safe to expand risk tolerance
Last week we knew within a few minutes that the “Dovish” decision meant trouble for US stocks, and we explained that potential outcome to subscribers in the Sevens Report before the announcement, and provided them with two ETFs that we believed would be great “pure play” hedges for a further decline in the stock market if the Fed were to “punt the rate hike” like they did.
Since last Thursday’s announcement, those two ETF’s are up 7.4% and 6.8% while the S&P is down 2.8% as of this morning’s open (and the respective gains and losses are being extended in today’s trade).
We’ve included an excerpt from today’s edition of The Sevens Report that explains why the Fed is causing this market sell off, and what needs to happen for it to stop.
Why “Hawkish” Is Good and “Dovish” Is Bad (Sevens Report Excerpt)
The last “big” event this week comes from Fed Chair Yellen this afternoon, where she will give remarks on the economy and monetary policy.
While I and others hold out hope that she will further clarify the FOMC’s position on rates, and that she sounds more “hawkish,” I don’t think that is going to happen, and as a result Fed uncertainty will remain a headwind on stocks going forward.
More broadly, from a market standpoint it’s important to realize that anything hawkish from the Fed is now a positive for stocks, and we saw that Monday when hawkish rhetoric from three Fed officials over the weekend, and again Monday morning, was a major reason for Monday’s rally.
As you likely know by now, Bullard, Williams and Lacker all stated that the vote on whether to hike rates was “very close,” and that all expected the Fed to still hike rates in 2015—somewhat contradicting last week’s very dovish FOMC statement, projections and press conference.
So, markets will welcome a hawkish Yellen because the market is getting increasingly more desperate in demanding a rate hike, and it’s for good reason.
- First, banks, which largely led the rally earlier this year, need to have credible chances of a rate hike in order to sustain their longer term rally. And, it’s no coincidence that the big break in stocks, which was led by the banks, happened August 20, the day after exceedingly dovish FOMC Minutes.
- Second, a rate hike will lead to a rally in the dollar which will pressure emerging market currencies, and that’s exactly what’s needed to help create economic growth in those countries as the commodity rout continues. Currency devaluation is their only way out at this point, but that can’t happen in an orderly fashion as long as the Fed is trying to push the dollar down.
- Third, a rate hike would, in some ways, act as a cut, because Fed uncertainty and doubts about the global economy is causing natural tightening by the market as banks, businesses and potentially consumers begin to react to continued emerging market turmoil, policy uncertainty and US and European stock market volatility. By hiking rates, projecting confidence and giving clarity, the Fed would provide certainty on policy that organizations need—and in some ways that would create a “phantom rate cut.”
Sadly, our confidence in this occurring before December (at the earliest) is low.
More broadly, the Fed now faces a problem. The FOMC clearly doesn’t want to raise rates while the stock market is volatile, but Fed policy confusion and indecision now is a major contributor to that market volatility, and the longer the Fed waits to hike (or at least produce a clear, credible strategy) the more volatility we will see.
Bottom line, it’s a strange new world where hawkish is good for stocks and dovish is bad—a total reversal of the last several years. Fed communications going forward need to be viewed in that light.
The Fed will be the #1 influence on the stock market between now and December, and we are committed to making sure our subscribers have the Fed analysis they need to protect client portfolios and seize opportunities.
Given the return of market volatility I am extending a limited time, special offer to new subscribers of our full, daily report that we call our “2 week grace period.” If you choose to cancel your quarterly subscription anytime during the first two weeks, we will give you a full refund.
4th Quarter Market Outlook
Since early August we have kept our paid subscriber focused on the two major fundamental headwinds on stocks: Fed Policy Uncertainty and Chinese Growth Fears.
Unfortunately, neither of those headwinds were removed over the past week, and because of that the Near Term Outlook for the Market Is Not Good.
While fundamentals aren’t screaming a bear market, this market hasn’t traded ”well” all year, so we have to be prepared for another “overshoot” by markets should the declines accelerate, just like they did in August.
That’s why we are keeping our subscribers focused on our two leading indicator ETFs (both of which are hitting multi-week lows today) and to the technical outlook for the market.
Those leading indicators also confirm that the Near Term Outlook for the Market Is Not Good.
Because of that, we’ve been consistently reminding subscribers about the “Pure Play” hedge ETF. Since August, when we first identified this liquid ETF as a good hedge, it’s returned 13.6% vs. -8.0% for the S&P 500.
And, it’s working again as this week this ETF is up 5.0% vs. down -1.2% for the S&P 500.
We understand why stocks are falling, we know the catalysts that are needed for it to stop, and we know what it will take to turn this correction into a bear market.
And our subscribers trust us to tell them when that occurs, so that they can spend this time with clients and not watching their quote machines.
Let us do the same for you.
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