MARKETS UPDATE (4:15 pm EDT)
The Federal Reserve and Janet Yellen are well aware of how overbought and unstable equity markets are right now. They realize how sensitive these markets are to their policy statements. This is why their policy rhetoric is usually highly nuanced and carefully balanced so as not to appear excessively hawkish or dovish. They want to give the appearance of being fiscally responsible (more hawkish) but also accommodating to financial markets (more dovish). They were able to strike this balance with yesterday's statements, although the tone was a little more on the dovish side, which was probably a good thing as stock markets are ripe for a major correction right now.
The wording of the Fed's statement was little changed from previous statements and reiterated the Fed's strategy of letting economic data determine the time of the first rate hike and avoiding specific references to a timetable.
Ms. Yellen was also evasive when asked about the timing of the hike and said: "...the importance of the timing...is something that should not be overblown...". She went on to explain that the overall path of the interest hike once it starts is more important than when it starts. Although neither the Fed nor Ms. Yellen referred to a specific time for the hike, the so called "dot plot" data that was released with the Fed's statement suggests that there could be two rate hikes this year and that 15 of 17 FOMC members expect the first hike before 2016. Many financial analysts also feel there could be a hike in September and possibly December. Will this happen or will the Fed continue to postpone a rate hike based on poor economic data? It is too early to tell, but we can be certain of at least one thing. When the first rate hike does arrive, it will have a negative impact on equity markets.
It seems like Wall Street is focusing mostly on the soothing dovish tones of Janet Yellen and is paying little or no attention to the hawkish implications of the Fed's "dot plot" data. The nervous DOW was down 100 points by early afternoon yesterday, but then it quickly recovered after the release of the Fed's statement and Ms. Yellen's subsequent press conference. Today the DOW was up 180 points. This is good news for our long position in the broad stock market, but we now have to watch for a possible top as we move into another important reversal zone early next week. The NASDAQ is already making a new yearly high, but can the DOW and S&P 500 follow suit? If one does but the other does not, we may have another case of bearish intermarket divergence and a signal to cover our longs. Holding my long position in the broad stock market for now.
Gold and silver also seemed to like the Fed's policy statement (and/or Ms. Yellen's comments). In Tuesday's blog I wrote: "If the Fed and Janet Yellen's statements are dovish (i.e. not in a hurry to raise interest rates), this could weaken the dollar and kick gold and silver prices up." Both precious metals rallied today while the U.S. Dollar Index broke below its round number support at 94. We will now wait and see if this rally in the metals can gain any legs. If it does, we will start to look for a top in silver around $17. Holding my long position in silver but out of gold for now.
The technical and cycle patterns in crude oil are a little ambiguous right now so I am going to remain on the sidelines of this market for now. If crude can make a new monthly high by early next week and stay under $63, it is possible another correction could follow and take prices well below $55. Any close above $63, however, would be bullish. Current directional momentum supports the bullish case.
The Federal Reserve and Janet Yellen are well aware of how overbought and unstable equity markets are right now. They realize how sensitive these markets are to their policy statements. This is why their policy rhetoric is usually highly nuanced and carefully balanced so as not to appear excessively hawkish or dovish. They want to give the appearance of being fiscally responsible (more hawkish) but also accommodating to financial markets (more dovish). They were able to strike this balance with yesterday's statements, although the tone was a little more on the dovish side, which was probably a good thing as stock markets are ripe for a major correction right now.
The wording of the Fed's statement was little changed from previous statements and reiterated the Fed's strategy of letting economic data determine the time of the first rate hike and avoiding specific references to a timetable.
Ms. Yellen was also evasive when asked about the timing of the hike and said: "...the importance of the timing...is something that should not be overblown...". She went on to explain that the overall path of the interest hike once it starts is more important than when it starts. Although neither the Fed nor Ms. Yellen referred to a specific time for the hike, the so called "dot plot" data that was released with the Fed's statement suggests that there could be two rate hikes this year and that 15 of 17 FOMC members expect the first hike before 2016. Many financial analysts also feel there could be a hike in September and possibly December. Will this happen or will the Fed continue to postpone a rate hike based on poor economic data? It is too early to tell, but we can be certain of at least one thing. When the first rate hike does arrive, it will have a negative impact on equity markets.
It seems like Wall Street is focusing mostly on the soothing dovish tones of Janet Yellen and is paying little or no attention to the hawkish implications of the Fed's "dot plot" data. The nervous DOW was down 100 points by early afternoon yesterday, but then it quickly recovered after the release of the Fed's statement and Ms. Yellen's subsequent press conference. Today the DOW was up 180 points. This is good news for our long position in the broad stock market, but we now have to watch for a possible top as we move into another important reversal zone early next week. The NASDAQ is already making a new yearly high, but can the DOW and S&P 500 follow suit? If one does but the other does not, we may have another case of bearish intermarket divergence and a signal to cover our longs. Holding my long position in the broad stock market for now.
Gold and silver also seemed to like the Fed's policy statement (and/or Ms. Yellen's comments). In Tuesday's blog I wrote: "If the Fed and Janet Yellen's statements are dovish (i.e. not in a hurry to raise interest rates), this could weaken the dollar and kick gold and silver prices up." Both precious metals rallied today while the U.S. Dollar Index broke below its round number support at 94. We will now wait and see if this rally in the metals can gain any legs. If it does, we will start to look for a top in silver around $17. Holding my long position in silver but out of gold for now.
The technical and cycle patterns in crude oil are a little ambiguous right now so I am going to remain on the sidelines of this market for now. If crude can make a new monthly high by early next week and stay under $63, it is possible another correction could follow and take prices well below $55. Any close above $63, however, would be bullish. Current directional momentum supports the bullish case.
RSS Feed