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Time For The Stock Market To Start A Hissy Fit

Powerful divergences still intact on the S&P 500, Nasdaq 100, etc... With a decent chance of a rate hike on Sept 21st, the market is likely to do one (or both) of two things:
1) throw a hissy fit before the meeting to try & scare the Fed away from raising rates, at it has done on all previous occasions when a decent chance for a rate hike was on the table or..
2) market participants remain complacent, with prices holding up near all-time highs, only to sell off sharply after a rate hike, should we get one at the conclusion of the Sept 20-21st FOMC meeting.

$SPX daily Sept 9th

$SPX daily Sept 9th

Should the FOMC decide to raise rates on Sept 21st, which the Fed Fund Futures are currently pricing in with a 73% probability, chances are good that the yield on 5-year treasuries will move sharply higher, which in turn, should cause a rally in the US Dollar.

 

Should the Fed raise rates later this month, the effects wouldn't be limited to just stocks & bonds but would likely have a direct impact on global currencies, with the dollar rallying against the Euro & the Yen, with the technicals on both of those two largest components of the US Dollar Index already reflecting the likelihood of a likely rally in the US Dollar, especially against the Japanese Yen. Should these scenarios play out, a rising dollar is also likely to have at least near-term bearish implications for gold & the gold mining sector as discussed in this recent post.

 

Bottom line is that we've seen a lot of chatter about the likelihood of a Fed rate hike in recent years, yet each time it appeared like a hike might really be on the table, the stock market threw a hissy fit like a bunch of spoiled children that didn't want to stop drinking from the delicious punch bowl, with good ol' mama Yellen giving in to their tantrums & giving the spoiled brats more of the sweet, sugary drink that they just can't get enough of.

Maybe we get a rate hike on Sept 21st, maybe not. However, it appears to me that the R/R over the next two weeks is clearly skewed to the downside as either the market repeats its usual pattern of selling off in front of any FOMC meeting where there is any decent chance of a rate hike or the market remains complacent, as it has recently, and traders & investors run the risk of holding stocks at nose-bleed valuation levels at what could prove to be the beginning of the first rate hike cycle in years.

Sep 9, 2016 9:35am|Categories: Equity Market Analysis|Tags: , , , , , |11 Comments

11 Comments

  1. Profile gravatar of morrienelson
    morrienelson September 9, 2016 10:00 am at 10:00 am

    Randy – Great analysis once again, was thinking about a similar scenario. The jawboning a couple of weeks ago didn’t work and today Rosenbloom (possible misspell) spoke this morning and called for a rate hike. Was looking for a bounce but opening volume is suggestive of follow through and we may have a last year August scenario on our hands going into next week. A sharp move down to the 200ma on the daily (SPX 2050’sh) by Fed meeting would be enough to scare Aunt Janet from raising and the short covering rally would be strong IMO.

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    • Profile gravatar of rsotc
      rsotc September 9, 2016 11:41 am at 11:41 am

      Thx morrienelson. Although anything is possible, it seems to me that we could have a Boy That Cried Wolf scenario going on here. Over the last couple of years, every time that chatter about a possible rate hike at the next FOMC meeting emerged, the stock market kicked & screamed (sharp sell-off) and got its way, with the Fed cowing down & keeping rates steady. This time around, here we are just less than 2 weeks away from the decision & the market is just off ATH’s… absolutely no fear.

      One day that big bad wolf (a rate hike) will come & unless the market sells off very hard over the next week or so, this is the perfect chance for the Fed to test the waters with a 0.25% rate hike as being right near ATH’s the market can easily afford a 10% or so correction if they do hike without inflicting too much damage to consumer confidence. If I were Yellen, I’d pull the trigger now, even if we get a half-decent drop before the 21st. JMHO

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  2. Profile gravatar of dan123
    dan123 September 9, 2016 10:01 am at 10:01 am

    Thanks you Randy, great work, looks like SOXS has finally started to move up 🙂

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  3. Profile gravatar of Shambo
    Shambo September 9, 2016 10:16 am at 10:16 am

    Great analysis randy, thanks. Expectation of a hike is behind my confidence to keep shorting GDX. I myself have no idea about a hike, except that they eventually have to hike, but with the election who knows. But the general expectation seems for a hike, as you cite.

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    • Profile gravatar of rsotc
      rsotc September 9, 2016 11:31 am at 11:31 am

      Shambo- From the looks of the charts, I still think at best GDX is likely to grind around in a big trading range for a while (weeks & possibly months). While I’m still short some individual miners, I have a core NUGT swing short that I plan to ride out the minor rips & dips for now (using the term minor relatively speaking as minor rips & dips in NUGT are measured in double digit percentage moves). Looking for a move below SLV 18.10 and GLD 125.10 to help firm up the intermediate-term bearish outlook for the PM sector and likely increase my short exposure but keeping it relatively light until then. Should that happen, min. target on GDX would be the 23.30 area.

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  4. Profile gravatar of rsotc
    rsotc September 9, 2016 2:03 pm at 2:03 pm

    One thing that I had intend to add to this post about the chances for a rate hike. I know that a lot of people believe that the Fed won’t raise rates before the election for political reasons & that may very well prove to be the case (although technically, it would be unproven, just speculation if they don’t raise for political reasons as they would never admit to it). With that being said, it feels to me that the market may have finally reached that dangerous threshold where the impact of a ZIRP on individual & institutional investors that depend on income from steady/safe investments such as retirees, pension plans, etc… are quickly running out of any viable options with treasury & CD yields still hovering just below zero and the blue-chip dividend stocks no longer a viable option as not only are valuations now at dangerously high nose-bleed levels but as the crowded trade of dividend investing has bid up prices on most of these stocks to all-time highs, increasing most stock prices beyond the rate of any dividend increases over the last several years it appears that yields have been falling due to the rise in stock prices.
    I have no doubt that the Fed is acutely aware of the fact that their policies are doing some current (by depriving them of income) & potential damage (if/when the dividend-stock bubble pops & granny is left holding the bag) and as such, I wouldn’t be surprised to see the Fed, for political reasons, raise rates before the election as I’d have to imaging that would please a large portion of the electorate. Food for thought.

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    • Profile gravatar of morrienelson
      morrienelson September 9, 2016 2:23 pm at 2:23 pm

      Randy – From a political conversation topic perspective I am seeing one major item and remember a past second item that could be used as the excuse for no rate hike on the 21st. Currently you are seeing HRC and the MSM paint Russia as being involved in tampering with the US election process, and in the same tone attempting to pin Trump to Putin since Trump is not denouncing Putin. So in the event that HRC loses the election, Obama can chime in and claim Russia tampered with the election and Loretta Lynch and the Justice department along with the HRC sided FBI can support the claim and hence either change the outcome or nullify the election. Secondly I recall back when Yellen went before Congress 3 or so months ago for what I believe was Humphrey Hawkins testimony or some other annual meeting before Congress, she was asked her opinion of Trump’s economic policies. Her answer to me is striking given that the Fed claims to be non-partisan but she proved otherwise by stating that Trump’s economic policies were troubling and could stifle growth. So now that she has played her hand and shown bias for HRC I would not all be surprised that if we are down 7% or so on the SPX by FOMC that she doesn’t hike and cites the global reaction to a potential Trump Presidency as the reason for the current market instability. You know as well as I do that the MSM would take this and run like crazy with it to scare the mainstream masses that are not paying one ounce of attention to what is going on with the markets at the moment. They have tried everything else to keep HRC in the lead (changing polling methodologies, press slamming anyone to talk about her health issues, crucifying Matt Lauer of NBC, typing Trump to Putin, etc). Apologies for the ramble but to me this scenario just makes too much sense.

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      • Profile gravatar of rsotc
        rsotc September 9, 2016 2:44 pm at 2:44 pm

        morrienelson- Well thought out & most certainly a possibility. The election is going to be a mess one way or the other & your suspicions very well could play out that way. Hopefully the charts will be our guide to successfully navigate through what I suspect will be a very volatile market over the next couple of months. Thx for sharing your thoughts.

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  5. Profile gravatar of jameske
    jameske September 9, 2016 2:14 pm at 2:14 pm

    Interesting point on raising rates. Are people, especially wise old people that still vote and have pensions worth talking about, easily bought with a 0.25% rate hike? And if it crashes the value of their portfolio just before the election, will it really get them voting the way the Government wants?

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  6. Profile gravatar of joefriday
    joefriday September 10, 2016 10:51 am at 10:51 am

    I guess it took the hissy fit route… LOL

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  7. Profile gravatar of joefriday
    joefriday September 10, 2016 11:00 am at 11:00 am

    I’ll also add insofar as the Fed raising it seems clear to me that they will do so in Sept…and have been making a coordinated effort this week to talk markets down so as to avoid a crash.. they will raise not only for the possible reasons Randy and others have stated above…but also b/c they know the economy is not as strong as they make it out to be..and know that they will need add’l ammo in the event of a recession… so by raising rates they now are giving themselves more room to cut rates down the road if necessary..before resorting to another round of QE

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