Tomorrow is the FOMC announcement. The Fed is widely expected to do nothing. The problem is how markets have performed going into the FOMC announcement.
The S&P 500 has run up an incredible +6.5% going into the FOMC announcement.
Who wants to chase the S&P 500 higher, especially when oil has plunged -9.3% over the same period?
If we chart SPX to WTIC, we see that when WTIC and SPX diverge with WTIC breaking to the downside, a stock market sell off soon follows.
If we create an SPX to Oil spread chart, you can see that whenever the spread has been above the 2060 line (blue), a pullback on SPX has occurred.
The Federal Reserve will probably not hike rates this week, but they may signal a September rate hike is on the table.
Fed Fund futures prices are putting a 45% probability of a rate hike at the December 14, 2016, meeting. I think the wiggle room is between now and December as that date slowly moves forward.
Banks and other financial service businesses are suffering under years of ultra-low interest rates. The Fed wants to get interest rates up as fast as possible without crashing the U.S. economy.
July was on the table for a rate hike before June 3, 2016, and the jobs report that showed just 11,000 jobs created in May. Then Brexit surprised everyone, and it looked like just one rate hike this year in December. Since the end of volatile June, a series of stronger-than-expected economic reports are now pushing the December rate hike forward. Even fears of Brexit’s adverse effects on the U.S. economy have faded as traders realize that the process will take years to complete.
Watch The US Dollar
The real monkey wrench in the Fed’s rate hike agenda is the US dollar. Brexit caused currencies like the British pound to sell off (Read More….)
One of the reasons I began supporting Donald Trump and declared GuerillaStockTrading as an official supporter of the Trump candidacy almost a year ago has to do with economics and ultimately the stock market.
The majority of people who are against Trump are not very smart when it comes to understanding international trade and macroeconomics.
Donald Trump has nothing to do with supporting isolationism, protectionism, or racism.
Donald Trump has everything to do with taking back control of the ‘I’ variable in the GDP formula. To improve the economy, Trump must grow GDP.
The GDP equation is: GDP = C + I + G + (X – M)
C = Consumption I = Investment G = Government Spending (X – M) = Net Exports (the difference between imports and exports)
The four drivers of GDP growth are consumption, investment, government spending, and net exports.
Net exports represent the difference between the exports of a nation and its imports. If imports are greater than exports, then a country runs a trade deficit.
U.S. Trade Deficit Over Time | InsideGov
Economic forecasters and stock traders like myself track the four different components of GDP via economic reports. For example, (Read More….)
Last week was a big week for trader psychology with multiple economic reports showing the US economy was not in free fall. The Fed Funds Futures market is pricing in a 43.3% probability of a rate hike by December 14, 2016.
Below is a quick breakdown of the better than expected economic reports last week.
US retail sales jumped more than expected.
I was not included in the Reuters polling, but I would have estimated 0.1 too.
What this means is that many traders realized they were a little too bearish after the crash of the May jobs report to 11K.
Retail sales including food services, excluding motor vehicle and parts, also crushed expectations to the upside.
Once again polling data showed that traders were a lot more bearish than was warranted.
Just when you think we have a pattern of good numbers, a big negative number messes with the pattern and keeps us all on our toes. Check out how weak the clothing and apparel component of the retail sales report is.
The CPI is finally moving higher, and it looks like we have a confirmed uptrend.
Core CPI rose perfectly in line with expectations, (Read More….)
A subscriber writes, “Lance, are you still bearish on SPX?”
Awesome question. Let me set this matter up and bring everyone up to speed.
In last weekend’s show, I gave the Bulls a slight advantage over Bears. The only reason I didn’t give Bulls a strong advantage was because I wanted to see what happened off the all-time high resistance level on SPX that has held for 14 months.
I wrote this article about what I was looking for on SPX this week.
The markets looked wobbly yesterday, so I took a position in UVXY and was stopped out for a small loss that you can see here.
Do Not Forget About Bond Yields
Bond yields are extremely low right now. Low bond yields mean that stocks are attractive. People can’t put their money into defensive bonds and expect that money to grow. Money goes where money is treated best. Comparative yields in the stock market are blowing bond yields away. It’s not even a contest. I think we have money from both inside the US and around the world flooding into US stocks because there are few other choices on the planet right now. Over $10 trillion (Read More….)
The yield curve continues to flatten at an alarming rate. The spread between the two years and the 30-year bond is the lowest since 2008.
In a note to clients, Deutsche Bank writes…
Since the UK referendum the US yield curve has flattened to new post-crisis lows… This relentless flattening of the curve is worrisome… the probability of a recession within the next 12 months has jumped to 60 percent, the highest it’s been since August 2008.
U.S. residential construction growth is grinding to a halt.
Even auto sales, which have been a bright spot for the U.S. economy for several years, are rapidly slowing.
Payroll growth has also dropped like a rock, and we await this Friday’s non-farm payrolls report update.
Do not panic folks. Deutsche Bank is saying that the odds of a recession are about the same as a coin-flip, 12 months from now.
The yield curve is still healthy.
Once the yield curve goes flat or even inverted, we usually have 3 to 6 months before a recession. The flat or inverted yield curve signal will give us plenty of time to react.
While the stock market could (Read More….)