Writing this blog every trading day, it's sometimes difficult to break from the very short term developments to see the larger trends that are at hand. It's a delicate balance that, honestly, I'm not always as focused on maintaining. But as is so often the case for those of us who follow the markets, there is something that always pops up that makes us all take a step back and reconfigure our viewpoint. The release of yesterday's Federal Reserve statement on interest rates was one of those moments for me. As I pointed out in my post immediately following the release, there wasn't a lot of news in the communique, despite what the pundits would have you believe. Sure, the verbiage surrounding the Fed's willingness to intervene in the marketplace changed, but, as I said at the time, this was a well known fact. The past couple of Fed statements have noted the FOMC's cautious outlook for the economy, so it stands to reason that accommodating actions would be in the offing. But putting aside the lack of real news in this statement, I found the spike and subsequent sell off in equities (which continued today) particularly interesting. To me, this showed that the equity market, once again, looked upon news from the Federal Reserve as a largely negative development. And, in my opinion, that reaction is correct. Think about it. If the U.S. economy is in need of additional extraordinary monetary stimulus, as many suggest yesterday's statement implied, that must mean that domestic economic conditions are worse than what the Federal Reserve expected at this point in time. Hardly the sort of outlook that would get you bullish on stocks.
Technically speaking, equity markets, as judged by the S&P 500, are still implying that the bull move is intact. While we have traded lower since the Fed's release, the widely watched 1,131 level has not been breached, which is a bullish sign. Momentum indicators like the RSI are suggesting that near term momentum is slightly overbought, but not to an extent that would strongly suggest that the rally couldn't continue. That said, there are warning signs all around. Among the loudest of these warning calls, in my opinion, is the continued strength of the U.S. Treasury market. I find it very difficult to believe that investors would continue to bid up bond prices if, collectively, there was any real confidence in the equity rally. Especially when you consider how far Treasuries have rallied over the past two months, the shallow, short-lived relief rally of late suggests that investor appetites for such securities hasn't been satiated just yet. And as long as Treasuries continue to find such robust bidding, equities are going to have a hard time moving higher.
Another indication of the economic concerns surrounding the equity market lies in the traditional bastion of fear: the gold market. Yes, the yellow metal continues to move higher in a relentless manner, climbing another $4.30/oz during today's session. To be sure, some of this rally has been underpinned by the weakness of the U.S. Dollar, but the relentless move higher since June cannot be attributed to anything more than investors clamoring for bullion ownership. Like Treasuries, investors don't feel the need to flock to this type of asset when the economic outlook and anticipated stock performance appear positive. Thinking back to the late 1990s, gold prices sat near the $300 level! That's a quarter of the price seen today. Clearly, then, there's a lot of concern still present in the marketplace and, judging by the price action over the past week or so, its continuing to build, despite what the sentiment surveys suggest.
Last, but not least, the U.S. Dollar's dismal performance the past few weeks is yet another sign that investors continue to have real concerns about the domestic economy. Sure, the Federal Reserve's policy actions are having an effect on the dollar's value as it continues to increase the supply of dollars as it purchases Treasury securities. But this is far from outright currency intervention and, therefore, the move lower implies that global investors are simply inclined to reduce their dollar-denominated assets in lieu of other opportunities. I don't want to overstate the recent decline in the dollar's value since it's still considerably stronger than it was in late 2008, but the speed and scale of the recent move lower implies that there has been a meaningful change in sentiment surrounding the greenback. My read is that it's a vote against the U.S. economy's likely performance.
While each of the concerns listed above are disconcerting in their own right, taken together, I believe they are sounding warning bells. For those of you who follow Fundamentally Technical on Twitter, you know that these alarms compelled me to initiate a small short equity position today. And while I have noted these issues for the last few weeks, the fact that the S&P 500's performance so far this September equates to its best performance on record pushed me all the way over to the short camp. To me, this is not the sort of economic environment that warrants such a run up and, therefore, provides a good opportunity to initiate a short with relatively limited downside risk. Using the ProShares Ultra Short S&P 500 ETF, I'm betting that we'll see a pull back of at least 1 or 2% over the next week or so. This could prove to be closer to 8 - 10% if we revert to September's norm. Looking to tomorrow, we'll get the latest jobless claims numbers and a look at the leading economic indicators, so volatility should be fairly robust. Most interesting than the actual numbers will be the reaction to them. Should jobless claims dip significantly and the equity markets trade unchanged or lower, I think this will be a sign that the correction I'm looking for is probably coming. If not, the bull run of the past few weeks will live to see another day. At the very least, though, the market's giving us all a lot to mull over, which is a nice change from the summer doldrums. Until tomorrow.....
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