The broad stock market has been falling steadily this week with the DOW, S&P 500 and NASDAQ making new weekly lows today. Yesterday's Federal Reserve meeting and release of its latest policy statement doesn't seem to be having much of an effect on equity markets, probably because most investors are waiting for the results of next week's presidential election before making any major trading decisions. The Fed, of course, is aware of this and did not make any dramatic changes from its last policy statement in September. It most likely does not want to "rock the boat" before the election. Not surprisingly, the Fed kept interest rates unchanged. Many analysts are expecting an interest rate hike in December, however, and yesterday's Fed statement seemed to support this view with a positive description of the economy and a comment that “the case for an increase in the federal funds rate has continued to strengthen”. Nevertheless, the Fed was typically cryptic in addressing when that first rate hike will happen, saying only that it would “wait for some further evidence of continued progress toward its objectives” before raising rates. This gave the statement a tone of tempered hawkishness. That tempering, however, may not be enough to calm a very nervous stock market.
Our cycle and timing analysis of equity markets continues to suggest that we are nearing the end of a medium-term cycle that could bottom anytime over the next several weeks. We are coming to the end of a reversal zone on Friday, but I am going to extend that into early next week because next Tuesday (election day) could be a significant turning point for many markets. Equities could bottom then and start to rally again. If they don't, we could see them fall lower into the end of the month when we have our next strong reversal zone. As I stated in Tuesday's blog:
"Normal targets for this correction could be anywhere from 17,300 - 17,900 in the DOW and 2,030 - 2,060 in the S&P 500. If markets panic, however, it is possible we could see a more severe sell-off. Given the bizarre and tumultuous nature of the current presidential election and the high level of anxiety in markets, I think anything is possible."
We sold this market short on Monday and have a small profit so far. Let's wait and see if equities can move lower and at least penetrate into the ranges stated above. If new lows continue after election day then it is highly likely we won't see the cycle bottom until the end of the month. Holding my short position in the broad stock market.
In Tuesday's blog on gold and silver I wrote:
"Gold and silver prices both surged to new weekly highs today and broke important resistance levels. This makes it much more likely that these metals started new medium-term cycles in early-mid October (Gold on Oct. 7 and silver on Oct. 7 or Oct. 19). If this is true, we could now see prices rally for several weeks (perhaps even months) as the new cycle attempts to match or exceed the previous cycle highs from June ($1,375 in gold and $21 in silver). Before we get too bullish, however, we need to recognize that the current highs are being made within a strong reversal zone specifically relevant to precious metals which extends through the end of this week. A price correction could therefore be imminent from any high between now and Friday. If gold and silver have indeed started new cycles then this correction shouldn't break below $1,240 in gold or $17 in silver."
All of this still applies. Yesterday both gold and silver prices surged to new weekly highs ($1,307 in gold and $18.73 in silver) and prices are down today. That may have been a significant high, but, as with the broad stock market,
I am going to extend the current reversal zone into early next week; therefore, these metals still have time to go higher before correcting down. As stated above, if gold and silver have started new cycles and the trend stays bullish then any subcycle correction now should not go too deep and would be a good spot to buy. We will watch for this. Still on the sidelines of gold and silver.
The U.S. Dollar Index rallied dramatically in October, seemingly in an attempt to overcome that 100 mark it failed to break through last year. Last week it got to 99, but this week the dollar is falling steeply and closed today just above 97. The dollar's fall this week helped propel precious metal prices higher, but now this index is encountering support in the 96 - 97 area. It may consolidate here and attempt another rally, especially since directional momentum in the U.S. Dollar Index chart is nearly 100% bullish, but other technical signals are suggesting it could break lower. Here too, we may have to wait until the outcome of next week's election to see where the dollar is heading.
In Tuesday's discussion on crude oil I stated:
"Directional momentum in crude charts is now mixed bullish and bearish, but it looks like a bottom is forming here. I may enter a long position tomorrow or Thursday if prices don't go below $45. "
Well, prices closed today at $44.75 (December contract chart) so there is a concern that the cycle is turning bearish. We will hold off buying for now. If prices move below $43.77 (the subcycle low of Sept. 20), we may have to alter our trading strategy for this market. Out of crude oil for now.