The market was doing just fine yesterday, climbing back from some morning selling, but with about an hour to go in the trading day, a former Minnesota Fed president chimed in that Fed Chairman Jerome Powell should probably cut rates at this week's meeting, and stocks started to accelerate higher into the close. So is this is where we are now... preemptive cuts so the economy doesn't slow down?
Again it seems like the Fed is just unwilling to let stocks fall so it's not your parent's stock market anymore. We're hearing about guaranteed salaries, whether people are working or not, why not guaranteed stocks market gains? Of course I'm being sarcastic, but it may be closer to reality than we think.
Now what happens if the Fed doesn't cut rates (and they won't)? Does it mean yesterday's late gains need to be taken back?
There's no doubt that the action looked good with the positive reversal day and the follow-through to last week's rally, which broke above key resistance. But we are seeing the indices getting stretched again with many indicators getting overbought, and whether the rally keeps going or not we may need another pause in the short-term.
This chart from sentimentrader.com shows that none of their indicators are showing excess pessimism, meaning there's very few bears out there, while 40% are showing excess optimism. Is that meaningful? Well the last two market tops came in January 2018 and October 2018 so...
Chart provided courtesy of www.sentimentrader.com
The S&P 500 (C-fund) broke out to a new leg higher on Friday and the move kept going on Monday. You can see that, since the lows, we've had a series of rallies, minor pullbacks, new breakouts, a narrow trend higher, then an eventual pullback again. If it continues it looks good for stocks, but from a contrarian point of view, investors are a lot more bullish now then they were to start the year, so this pattern may be getting overly extended.
The DWCPF (S-fund)
came back strong on Monday, leading the way, after lagging a bit last week. Unlike the S&P however, it hasn't made a higher high yet on this move up.
The Dow Transportation Index bounced back after also lagging last week. It poked its head above some pesky resistance yesterday but it is still below the 2019 highs.
The EFA (I-fund) rallied as the dollar dipped. It's nearing the top of a rising trading channel.
The dollar slipped again yesterday and is now flirting with important support. The 50-day EMA may actually be the more important level.
The AGG (F-fund) was flat to just slightly lower as the overhead resistance is holding, although still rising. Low bond yields have helped investors choose stocks over bonds recently so if this does fall back to the lower end of its channel, it could spook the stock market a bit while bond yields rise.
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