As expected, the Fed announced at 2 pm yesterday that it would raise the central bank's key interest rate one quarter-point. At the Fed's 2:30 pm press conference, Chairman Jerome Powell sounded upbeat about the chances of a "soft landing" for the U.S. economy, but only slightly less hawkish in his plans to tighten (i.e. raise rates) moving forward. Nevertheless, he did suggest that if inflation and economic data becomes more positive, it could lead to fewer rate hikes down the road. That seemed to be enough to trigger a late day rally in the broad stock market, especially in the S&P 500 and NASDAQ. Earlier in the week, equities were falling, so perhaps we are also seeing an example of "sell the rumor" (of the Fed rate hike) on Monday - Wednesday morning, and then "buy the news" Wednesday afternoon.
Today, the rally followed through strongly in the S&P 500 and NASDAQ (both "gapped" up to new weekly and monthly highs), but the DOW was much less enthusiastic and remained relatively flat (apparently the poor performance of United Health was responsible for pulling down the DOW). Although the DOW now seems bearish compared to its two companion indices, we should note that the DOW already exceeded its August 2022 high back in Nov. 2022, while both the S&P 500 and NASDAQ are still well below their August 2022 highs, so these latter two indices are still catching up. This actually creates a strong bearish divergence signal (until the S&P 500 and NASDAQ can clear those August highs). We also have another shorter-term bearish divergence signal this week if the DOW can't exceed its Jan. 13 high (34,342) tomorrow (Friday). We are now at the center of a weak reversal zone (Jan. 30 - Feb. 7), so a significant top could be imminent (especially with these bearish divergence signals in place). Let's see if Wall Street's optimistic response to this week's Fed meeting can propel the market higher and at least push the DOW above that Jan. 13 high. If not, we may look to sell short or maybe just wait for a corrective low to buy near the final bottoms of the current medium-term cycles (as long as they don't go TOO low) which are coming due soon. We remain on the sidelines of the broad stock market for now.
The U.S. Dollar Index usually benefits from a hawkish Fed, so yesterday's slight softening of Powell's rhetoric on tightening may have pushed the greenback down yesterday and today. The support line at 102 has clearly broken. The next support levels would be around 100, 97-99, 96, and then strong support at 95. We just entered a reversal zone specifically for currencies (Feb. 1 - Feb. 9), so one of these levels could end up being the support line for a reversal back up and the start of another strong rally this week or next. If that happens, it could put downward pressure on gold and silver prices. But as long as the U.S. dollar is trending down, the precious metals will likely have upward momentum.
We are at a crossroads in the longer-term picture of the U.S. dollar. It's highly likely the U.S. Dollar Index started a new long-term 14-year cycle with its low of 89.20 in Jan. 2021. If that is the case, it is very early in this new cycle, and the dollar should be bullish and ready to rise to new highs and probably challenge the 121 high (July 2021) of the last 14-year cycle. There is a chance, however, that we are still in an older 14-year cycle that started with the low of 70.69 in March 2008 and peaked with last year's high of 114.78. In this scenario, the dollar is bearish and is now in the process of falling to its final 14-year cycle low due anytime now. If the U.S. Dollar Index starts closing below 97, it would suggest that this bearish labeling is correct. A close below the 89.20 low would probably confirm it. For now, I am favoring the bullish scenario of a new 14-year cycle.
I will discuss the long-term cycle of the U.S. dollar in more detail at some point in the future.
Not surprisingly, gold and silver prices shot up yesterday as the Fed announcements seemed to weaken the U.S. dollar. Both metals, however, lost all that gain and closed lower today. We may have been premature in covering our short position in silver yesterday if both metals fall and make new lows still within our reversal zone for precious metals (which ends next Tuesday). Let's wait and see how prices move tomorrow and early next week. If silver moves below $22.81, we may have to re-label the start of the new medium-term cycle (and also re-label this week's sub-cycle low in gold from Tuesday). We are now on the sidelines of both gold and silver.