What started to look like a rather normally bullish rebound got a boost late this afternoon as the Federal Open Market Committee's October 28th, 2003 meeting minutes were released at 02:00 PM EST, where a rather shocking revelation was interpreted by the markets that the Fed really is thinking that the weak dollar and high productivity can allow for low interest rates, potentially into 2005.
Here are two paragraphs that I copied from The Federal Reserve Boar's website, and the Federal Open Market Committee minutes from October 28, 2003. You can view the full report if you would like (it is rather interesting what they discuss) at this http://www.federalreserve.gov/fomc/minutes/20031028.htm
In their review of the outlook for inflation, members emphasized that the prospects for persisting slack in labor and other resources in combination with substantial further increases in productivity were likely to hold inflation to very low levels over the next year or two. Indeed, many saw modest further disinflation as likely, at least over the year ahead, though they also agreed that the probability of substantial and worrisome disinflation had become increasingly remote in light of the recent strengthening in economic activity. Members also cited the weakness in the dollar as a factor that would tend to reduce the degree of any domestic disinflation. Some members emphasized that the outlook for inflation was clouded by a high degree of uncertainty about the underlying trend in productivity. The growth in productivity could remain higher than had earlier been anticipated, damping employment, labor costs, and price pressures. On balance, the members did not view changes in inflation in either direction as likely to generate significant policy concerns over the forecast horizon.
In the Committee's discussion of policy for the intermeeting period ahead, all the members agreed that an unchanged target of 1 percent remained appropriate for the federal funds rate. The current degree of policy ease evidently was contributing to an upturn in the expansion of economic activity. The strengthening economy had reduced concerns of significant further disinflation, but those concerns had not been eliminated. The pickup in demand had yet to materially narrow currently wide margins of idle labor and other resources, and these margins along with the uncertainties that still surrounded current forecasts of robust economic growth suggested that an accommodative monetary policy might remain desirable for a considerable period of time. Members referred to the contrast between their current policy expectations and the typical experience during earlier cyclical upturns when it was felt that policy adjustments needed to be made quite promptly to gain greater assurance that inflation would not rise from what were already relatively elevated levels. In present circumstances, the degree of slack in resources and a rate of inflation that was essentially consistent with price stability suggested that the Committee could wait for more definitive signs that economic expansion would otherwise generate inflationary pressures before making a significant adjustment to its current policy stance.
You know me (Jeff Bailey), I like to benchmark things from time to time. On October 28th (October FOMC Meeting), the U.S. Dollar Index (dx00y) 88.87 +0.02% had the 6 foreign currency weighted dollar index trading at 91.87, and we can see since that time, the dollar has shown weakness. Now, I will also make note that the U.S. Dollar Index (dx00y) did rise to 94.00 in early November. However, the comments regarding the dollar's weakness is viewed by the committee as lessening the possibility of deflation being a problem, combined with the dollar's further decline, did receive some positive comments from economist's this afternoon.
What seemed to shock investors and seemed to create the bullish response toward equities and Treasury bonds, was the last sentence of the first paragraph I copied and the statement, "did not view changes in inflation in either direction as likely to generate significant policy concerns over the forecast horizon."
And that sentence is still the topic of discussion as Treasuries suddenly found strong buying, which drove the benchmark 10-year YIELD ($TNX.X) lower by 8 basis points to 4.238% by the close, and reversing earlier session price losses.
The topic of discussion is if the Fed is keeping rates low only because it feels the weaker dollar helps keep any deflation at bay, while at the same time, productivity is so high and labor plenty, that this offsets the possibility of inflation over the Committee's forecast, which is looking out two years to 2005?
While I don't have the answer to this debate, I would have to interpret the market's reaction as rather bullish, and I'll discuss this not only from price action, but from what we saw from the market's internals just after the 2:00 PM announcement.
Market Snapshot / Internals - 12/11/03 Close
Did the FOMC minutes get a market response? Look at the volume rate jump from the 03:00 to 04:00 mark. The biggest jump actually came in the last hour of trade, where both the NYSE and NASDAQ showed hourly volume increase by about 400 million shares, while from the 01:00 EST to 03:00, volume builds were rather steady.
Internals certainly showed some improvement from the 02:00 hour, and while the volume levels jumped from 03:00 to 04:00 (read the FOMC notes, then make a buy/sell decision) the increase in volume shows interest in what the Committee had written. While price action matters most, and was relatively unchanged from 03:00 on, I would have to disagree, based on the internals, with some comments I read from analysts saying the eventual reaction was negative, on concern that the Fed holding to its decision to keep rates low, is a sign that the Fed is OVERLY worried about the economy.
Here's a quick look at the pivot analysis matrix for tomorrow, where some of the recent two session's of losses in the lagging NASDAQ-100 Index (NDX.X) 1,416.96 +2.01% and its Tracking Stock (AMEX:QQQ) $35.30 +2.14% was recouped.
Pivot Analysis Matrix
I'm not going to make any adjustments to today's profiled bullish swing trade in the QQQ from $35.05, stop $34.20, target $35.75. However, one test tomorrow that I think a bull would like to see the QQQ find some intra-day support at is at the Daily Pivot of $35.06, but some work I've done elsewhere, has $34.97 a more likely point where I would really want to see some QQQ support.
There aren't a lot of good correlations in the matrix for tomorrow, but a good test for further upside would be if the BIX.X can move back above its WEEKLY Pivot and WEEKLY R1. The banks might just be able to do this based on the Fed's October comments. The reason I say this is the sudden decline from Fed funds futures, which to me signals that there were a lot of market participants really thinking the Fed was going to raise rates this spring, but with Fed funds futures falling rather sharply, it may be that some of the weakness in the banks, might have been attributed to thoughts of higher interest rates, which can be viewed as a negative for banks.
Dow Diamonds (AMEX:DIA) - Daily Intervals
I spent too much time on this DIA chart, but I wanted to show an index, where I could display some volume. The DIA is also a good chart to look at when the 10,000 mark on the Dow Industrials (INDU) has been tested again, which for the indices we've discussed like the Dow Transports (TRAN) 2,965.90 +1.82% which traded down rather sharply from 3,000.00, and the NASDAQ Composite (COMPX) 1,942.32 +1.97%, which traded down rather sharply from 2,000.00, the DIA and INDU have held up rather well after Tuesday's test of 10,000, and today managed to hold that level by the close.
I did some work with a regression channel from the March lows to TODAY's trade. At the lower left corner of the above 30-minute interval chart, this brings into view a test of its base regression on November 21st, and on a DAILY interval bar chart, would show this base regression also being tested.
My thoughts for a Santa Claus Rally would be that the mid-point of this regression will provide bullish resistance, and I would simply be amazed if the DIA traded much above $102.00 between now and the end of December. For now, holding support at MONTHLY R1, would in my opinion, be a strong sign of support.
S&P 500 Index Chart - Daily Intervals
Today's bold move back higher came just in the "St. Nick" of time for a bull's thoughts of a Santa Claus rally. Without so much as a look back lower, like I thought we might see early in the session, the WEEKLY Pivot should be viewed as support tomorrow, and a break above the 1,075 level could well see 1,080. I'm not aware of what this expiration's "Max Pain" levels are, but a break above 1,075 could trigger some unraveling of at or in the money puts, with option expiration next week.
The reason I say this, is in yesterday's market monitor, fellow analyst Jonathan Levinson thought the lower trade might have been attributed to futures rollover. This is something I'm not all that up to speed on (impact of futures rollover) but with rollover complete, the SPX sure seemed to want to recoup yesterday's losses in quick fashion.
NASDAQ-100 Tracking Stock - Daily Intervals
I'm surprised at today's percentage gain, and I thought it would be a bullish day for a swing trade long if the QQQs could muster a move to the MONTHLY Pivot. While a follow through day would certainly be positive for a swing trade bull, I would like to see the QQQ hold $35.09-$35.10 and have MACD turning back higher from its zero level.
With the NASDAQ bullish % reversing to "bear alert," I don't want to get cute with a bullish trade, and will gladly look to book gains on a trade at $34.75.