Fed Outlook & Technical Update

On Tuesday we got a call from a frantic, paid subscriber of The Sevens Report who asked us to send him another copy of the morning email because he had mistakenly deleted the original!

He said of all the days of the year to mistakenly delete it, Tuesday was the worst, because the phone was ringing off the hook and he needed the report to help calm nervous clients and demonstrate to them that despite all the market volatility, HE was in control.

We’ve received more positive feedback from our paying subscribers this week than any other so far this year, and that tells me that we’re doing our job, providing value to our subscribers, and helping them navigate this very difficult market environment. 

Subscribers to the Sevens Report know that, especially in markets like this, they will have the knowledge they need to discuss any market topic a client may bring up, whether it is:

  • Stock market valuations
  • What the Fed is going to do next
  • Where interest rates are headed

Or most importantly right now,

  • Whether the bottom is “in” or not.

I created this report because I know that most financial advisors and professionals are not glued to blinking screens from 9:00 – 4:00 each day. That goes double for times like this, when clients are more demanding than normal!

Right now, most of an advisor’s time is being spent reassuring nervous clients, not analyzing Fed commentary for signs of a rate hike in September, studying the yield curve, monitoring Chinese economic policy or identifying key technical levels that could result in a further decline in stocks. 

In normal times, the most successful advisors use tools like the Sevens Report to stay ahead of the markets (stocks, bonds, currencies and commodities) and to make sure their clients are positioned to both outperform while also being protected from any financial “storm” that may blow up.

During times like today, advisors trust us to provide them the critical information they need each morning at 7 AM, so they can spend their day managing those client relationships.

And that’s why we believe the Sevens Report is the Best Value in Independent Macro Analysis.

Specifically, during tumultuous periods like this, we tell you:

1) What you need to know,

2) What will move markets, and

3) What will make those events positive or negative for stocks and other asset classes. 

Every morning at 7AM we deliver this information, so you can show your clients you’re on top of the markets regardless of the environment.

Turning to the markets, we’re seeing the oversold bounce in stocks continue, and now that the panic has subsided for now, focus is turning back to the Fed, as it remains the single biggest influence on this market.

Recent Fed commentary has resulted in a shift in the outlook for Fed policy, but contrary to the media’s analysis, the Fed hasn’t gotten materially more “Dovish.”

Below we’ve included an excerpt of our recent Fed analysis as well as our near term outlook for the broad stock market.

Why Interest Rates Are at Three Week Highs (Despite the stock market correction)

Expectations for Fed policy have shifted over the past week thanks to stock market volatility and comments from two prominent Fed members, Atlanta Fed President Lockhart and Vice Chair William Dudley. The stock market volatility is obviously dovish for the Fed near term, and that was confirmed by Lockhart and Dudley both backing away from a September rate hike.

Yet despite this dovish news, bond yields have shot up this week and erased last week’s declines as the long bond has dropped sharply over the past two days.

To understand why bonds are falling and yields are rising despite this dovish rhetoric, it’s critical to realize that both men actually said.

  • First, the chances of a rate hike in September have diminished, but
  • The chances for a rate hike in 2015 are still strong (so October or December).

This matters to bonds investors because it could continue to weigh on longer dated Treasuries and push bond yields up.

Here’s Why:

  • Until August, we’ve seen consistent selling in the 2-year Treasury, as investors priced in a rate hike in September.
  • At the same time, the 30-year Treasury bond rose significantly as investors priced in a “one and done” rate approach where the Fed would hike in September, but then delay future hikes more than previously expected, making longer-dated bonds more attractive.
  • Now, that trade is unwinding, and we are seeing 2-year Treasuries more buoyant, while the 30-year Treasury comes for sale.
  • So, while a September hike may be unlikely because of short-term volatility, a hike in 2015 remains likely (for now).
  • More importantly, it is probable that the Fed may feel the need to play “catch up” given the delayed liftoff, and that makes the “one and done” less likely, and 30-year Treasuries less attractive.

This matters because:

1) It could signal good news for Inverse Bond ETFs (which need all the good news they can get lately) and

2) It’s steepening the yield curve, which will become a tailwind on bank stocks if this continues.

Bottom line—a rate hike in September is unlikely unless we have a very strong jobs report and a big recovery in stocks; however, a hike in 2015 remains the general market expectation, and in the perverse logic realm in which we now operate, waiting to hike till later this year could actually be a negative influence the long bond.

Understanding the Fed remains critical to getting this market “Right” near term.  Make sure you’re got an analyst team committed to helping you understand what expected Fed policy means for all asset classes.

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Key Technical Levels in the S&P 500 and Oil

We utilize a mix of fundamental and technical analysis here at The Sevens Report, but in markets that are moving as quickly as these, fundamentals can take a back seat and in the very short term, and technicals can be a better guide to the short term direction of markets.

So, over the past two weeks we’ve been focusing a bit more on the techincals than usual, and there are two potentially positive developments occurring in the S&P 500 and Oil today:

S&P 500

Typically we don’t look at shorter term charts for techincal signals, but this is not a typical market.

While by no means an “All Clear” signal, if the S&P 500 can close above intra-day resistance at 1950 level (which appears likely as of this writing) that will be the first positive technical signal we’ve gotten from stocks in a while.

So, 1950 is the level to watch in the S&P 500 as we approach the closing bell today.

Oil: Potentially Bullish Price Action on the Charts Today

Oil Bottoming is one of our “Six Steps to a Market Bottom.”  Fundamentals are slowing turning more positive, so it’s encouraging then that oil is up over 9% today and trading well through resistance at $40.50 today.

If oil can close above that level, it will be an encouraging signal and a step closer to a bottom in oil and in stocks.

We watch both fundamentals and technicals across asset classes to help alert our paying subscribers to opportunities and risks in markets. 

Subscribe today to make sure you get daily macro analysis that cuts through the market noise and delivers “Need to Know” fundamental and technical analysis.

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We Find the Leading Indicators

1. In January 2014, when the S&P declined 7% in three weeks, we correctly identified that emerging market currencies were the “reason” for the drop, and identified the Turkish Lira as the key indicator to follow.  When it bottomed, stocks bottomed, and our subscribers knew it.

2. Last April, when the S&P 500 declined 4% in two weeks, we alerted our subscribers that the “momentum” sectors of internet stocks and bio-techs were responsible for the drop, and specifically identified QNET and NBR as two leading indicators to watch.  When they bottomed, stocks bottomed, and our subscribers knew it.

3. During the September/October declines, our subscribers knew junk bonds (and the ETF JNK) were the leading indicator for the market.  When JNK bottomed, so did the market, and our subscribers knew it.

4. Recently, as early as November we told our subscribers that oil, XLE and the Dollar Index were the leading indicators of markets, and until the first two stopped declining and the latter stopped rising, stocks would be under pressure.

Our ability to identify key leading indicators has had a direct benefit to our subscribers, and I know that because they’ve told me.  One subscriber (an FA at a bulge bracket firm) wrote to us saying:

“Thanks for your continued insight; it has saved my clients over $2M USD this year…Keep up the great work,” 

We watch all asset classes to generate clues and insight into the near term direction for stocks, because our job is to remain vigilant to both the next possible decline as well as the next run to new highs.

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Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

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