Yesterday the Fed raised interest rates for the third time this year and signaled that it will likely raise them again in December. The rate hike and the Fed's hawkish tone was not unexpected, but what surprised many analysts was the removal from the Fed's policy statement of the long-standing language saying that its stance on interest rates “remains accommodative.” Some saw this as a sign that the Fed could turn dovish soon, but Fed chairman Jerome Powell was quick to counter that “This change does not signal any change in the likely path of policy,” and that “Policy is still accommodative,” leaving analysts to wonder why "remains accommodative" was taken out of the Fed's statement. Of course, this kind of contradictory message is designed to temper excessive speculation in any one direction.
Immediately following the interest hike announcement yesterday afternoon, the DOW dropped about 300 points, but today it recovered at least some of that loss. We bailed out of our short position in the DOW last week thinking equities would push higher into next week's reversal zone (Sept. 28 - Aug. 8). There is still time for this market to do that, but it could also continue down and make a low instead of a high. A new all-time high next week in one or two (but not all three) broad stock market indices (DOW, S&P 500 and NASDAQ) would be another good opportunity to sell short. If this market instead continues to fall, there is a possibility of a very deep correction into next week into the final medium-term cycle bottoms of all three indices. I think it is more likely, however, that any low would probably be a more shallow sub-cycle correction. In that scenario we would likely go long for a final multi-week rally to another top before the final steep correction to the cycle bottoms. We will stay on the sidelines for now and see what kind of cycle pattern unfolds next week.
One thing that concerns me now about the broad stock market is the upcoming mid-term elections in the U.S. These take place in the first week of November. Divisiveness in this country between Democrats and Republicans, Liberals and Conservatives, and Trump haters and Trump supporters has risen to an extremely high level of toxicity and venomous hatred that I have never seen before in my life (I am now 61). At the risk of sounding like a conspiracy theorist, and without making any partisan political statements, I think most people would agree that there are more than a few people, some in powerful positions, who would like to weaken (or even destroy) President Trump and his administration. Engineering a major stock market correction near the election would certainly not help the Republican side of the coin, and this would probably not be that difficult to do considering our technical discussion above which shows that a steep correction in equities could be imminent. I believe this is something to keep in mind as we approach November.
It looks like we pulled out of gold and silver at the right time yesterday as both metals dropped significantly today. We will now watch for new lows in these metals within next week's reversal zone. If gold breaks below $1161 while silver stays above $13.95 or if gold stays above $1161 while silver breaks below $13.95, we will have an ideal set-up to go long again in both metals next week. Either scenario would be a strong bullish divergence signal. On the sidelines of both gold and silver.
Like the broad stock market, crude oil may also be pushing towards a new high in next week's reversal zone. If so, it will also be in a good position to sell short again as a final top and substantial correction to the current medium-term (and probably longer-term) cycle bottom is expected soon. We will watch for this. Out of crude oil for now