TSP Talk Blog

Did the Fed pivot? The market did the Fed Flip yesterday. Stocks were lower most of the morning and once the Fed delivered their policy statement, the 0.25% rate hike, and began the press conference, the Dow was down over 500-points and the S&P was down 40+. Fast forward 15 - 30 minutes later and everything turned around. The indices did sell off in late trading to take them off their highs - perhaps profit taking as the S&P, up about 75-points at its highs, ended the day up 43, and the Dow closed up 7-points. Bonds rallied as yields fell sharply, and the dollar was down helping prices across the board.

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The Fed never really said "pivot" but he seemed very comfortable on that podium at the press conference and threw the word "disinflation" out there and investors pounced on this new outlook, despite the fact that nothing has really changed. That is, they did raise interest rates again and did not rule out another increase at their next meeting, but clearly he has a more dovish sound to his rhetoric. He didn't mention being concerned about the stock market rally, so we didn't get any "irrational exuberance" lecture.

This sounds like good news for the economy and perhaps he hinted that the chances of a recession may have lessened, but the stock market is not the economy. The stock market leads the economy and economic data is rear-view mirror data. So, was the rally that we have experienced, whether in January or all the way back to the October market bottom, the market front running what the Fed was talking about yesterday? In other words, did the market buy the rumor, and now we're getting ready for a sell the news reaction?

That didn't happen yesterday but emotions are so high on FOMC meeting days that it's tough to judge what's really happening. There are investors buying on the information they heard but it is mostly traders banging heads with each other trying to grind out a profit on the day.

The argument against a sell the news reaction is that the charts have been improving for several weeks and they've been breaking above resistance and above bullish formations like inverted head and shoulders and cup and handle patterns. The January rally was big and profit taking, especially after the Fed rally and perhaps after today's big tech earnings announcements after the bell, would not be unusual, but what we'll want to see is if the dip buyers come back in fashion like we normally see in a bull market.

Anyway, the Dow traded in a 750-point range and here's a 5-minute chart of the S&P 500 for entertainment purposes. That's a range of over 110 S&P points.




After the bell yesterday Meta (aka Facebook) reported earnings and was trading up 18% in afterhours trading so we could see a little tail wind helping stocks to start the day today as the futures moved higher as well, but again Apple, Google and Amazon all report after the bell today so don't get too comfortable yet. There could be more volatility to come. These important company charts look encouraging, but they are near make or break areas.




As for the bond market and the dollar, both yields and the dollar fell sharply, helping the bond market and lifting prices of commodities. The bear flag on the 10-year Treasury yield broke down, and that has it looking over the precipice of its neckline of the head and shoulders pattern.



The dollar fell to another new low after moving sideways for three weeks.

We get the January jobs report on Friday and estimates are looking for a gain of 190,000 jobs and an unemployment rate of 3.6%. With the Fed out of the way the data won't be as sensitive to the Fed's interest rate decision. We may even see a good news is good news reaction (or bad is bad) for a change if it is above estimates, rather than worrying about inflation.

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The S&P 500 (C-fund) made a new high above the prior peaks, but closed just below the rising trading channel's resistance line. The inverted head and shoulders pattern didn't create much of a right shoulder, so that makes it a little more vulnerable, but this still looks positive. A pullback down to 4000 - near the 200-day EMA and toward the bottom of that channel, are more likely without that right shoulder. Other than that, there is a lot of support and we could see dip buyers show up quickly on any selling. That is unless the financial institutions, some of which are still very bearish, pull the rug out from under the bulls again. The indicators are quite overbought so there are some counter forces working against each other at the moment.




The DWCPF (S-fund) had broken out last week and here it is showing no signs of failing, although it is at some resistance. A move back into the low 1700's could be a good buying opportunity for anyone who missed the boat, but a move below 1700 would be a breakdown and a warning.




EFA (I-fund) loved the decline in the dollar yesterday but the economic situations overseas is not quite the same as the US so this has been moving more independently and not exactly following the US indices.



BND (bonds / F-fund) rallied to another higher high so the bond market still looks good. The question is whether to bother using the F-fund if stocks are also going to move into a new bull market?




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Thanks so much for reading. We'll see you back here tomorrow.

Tom Crowley





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