Ignoring President Trump's warnings to not hike interest rates, the Fed today raised benchmark interest rates by one quarter percent. A slightly dovish tone was struck, however, as the FOMC's projection for future hikes indicated only two rate hikes for next year rather than a previous projection for three. After rallying strongly earlier in the day, the DOW plunged on the Fed's announcement. Wall Street may have been expecting the Fed to encourage a "Santa Claus" rally by holding back a rate hike. The next few days will tell us how upset equity markets are with the hike. The dovish gesture of removing one hike from next year's plans may be enough to placate the markets into a seasonal rally into Christmas (next week). If that happens and the rally stays below 25,400 in the DOW, we will be looking for a top to sell short. If this market continues to plunge sharply, however, we may have to wait for a final bottom to buy sometime in January. Still on the sidelines of the broad stock market.
Not surprisingly, the rate hike had the opposite effect on the U.S. Dollar Index which was down early in the day but then shot up on the Fed's announcement. This in turn pushed gold and silver prices down in the afternoon after both metals made new highs earlier in the day. We could now see the precious metals move down to their final medium-term cycle lows over the next few weeks. Our intention is to buy at those lows. On the sidelines of gold and silver for now.
In my last blog on crude oil (Dec. 12) I wrote:
"...prices could go lower from here. If they don't, we will assume that the $49.41 low of Nov. 29 was a medium-term cycle bottom (and possibly a longer-term cycle bottom as well which, if true, means we are now in a good place to buy)."
Well, prices have broken below $49.41 (Jan contract chart) this week. Today they got to $45.93. This means that the longer-term (3 year) cycle is likely not over yet and wants to go lower. There is a possibility, however, that a new medium-term cycle started with that $49.41 low. If true, the cycle has already turned bearish (because it has broken below its starting point) and could continue down for many, many more weeks (as it is still young). In that scenario we might try and sell short the top of any short-term rally. A second possible scenario would abandon this idea of a new medium-term cycle and assume we are still in an older cycle. In that case, a final low would be due soon. The next reversal zone for crude is mid-January so that could turn out to be the final bottom and a good place to buy. We will stay on the sidelines for now until we have a little more clarity in these cycles. Our main goal now is to identify and buy that final 3 year cycle low.