The market expected a +0.25% rate increase and that's what it got. The market also expected some statements about an improving economy and the need for further rate increases in 2017 and that's what the Fed told us. The market's reaction was a bit of "but I want more" and promptly sold off on the news.
Today's Market Stats
There were no surprises from today's FOMC announcement, with the +0.25% rate increase and a promise for more, and the market had already baked this information into the cake. Without additional "good" news the market sold off in a sell-the-news reaction. But a post-FOMC reaction if often reversed the next day and there are some support levels tested this afternoon, leaving the door open for the bulls to charge back through and take the market higher. But they'll need to not waste time Thursday morning.
The market of course did not care about any of this morning's economic reports, nor will it care about tomorrow's or the next day's, or the next. This morning's economic reports were mixed with weaker than expected retail sales, industrial production and Business Inventories (lower inventory builds will lower GDP). PPI numbers came in stronger than expected -- November was up +0.4%, which is nearly +5% annualized. This could be one factor that has the Fed talking a little more hawkishly about rates in 2017.
As for what the market really cares about right now, I think it comes down to just two things -- WWTD and WWFD -- what will Trump do and what will the Fed do. And of course no one really has a clue about either. The strong rally from the beginning of November has been one based on hope and they're the most dangerous kind of rallies (most often found in bear markets). Nothing has changed and we have no idea how much or how little Trump's team will be able to accomplish. Hope-filled rallies are emotional rallies and they're subject to fast reversals when that hope is popped.
As far as what the Fed will do, following the no-surprise +0.25% increase, they told us today they were feeling confident enough in the economy to promise us 3 more rate hikes in 2017. That was a good-news, bad-news thing because on the one hand it's good for all of us if the economy is truly getting stronger and is able to handle 3 more rate hikes. But there are multiple bad-news scenarios with increasing rates, one being the greater difficulty in paying down debt that is tied to Treasury yields, such as mortgages. The Federal and State governments, companies and individuals are carrying massive amounts of debt and servicing that debt is going to become an increasingly difficult burden to carry. That will have a significantly negative effect on the economy.
More significant than even in the U.S. is what higher rates could do to worldwide economies and banking systems. A stronger dollar, which not surprisingly rallied strong this afternoon, creates negative problems for international companies. And because the U.S. dollar is the world's reserve currency a strong dollar makes it difficult for countries to service their debts in U.S. dollars (because their currency is devalued). Companies and countries have been borrowing in U.S. dollars because of our abnormally low interest rates over the years. These companies and countries that borrow in U.S. dollars will then typically hedge their position by buying U.S. dollar contracts and if the dollar rises they simply use the profits to offset the higher loan amount they have to pay back in their local currency. Problem fixed!
But one of the problems with borrowing U.S. dollars and hedging with long dollar contracts is that it's actually causing a shortage in U.S. dollars, which of course seems ludicrous with all the dollar printing the Fed has been doing. But this is a clear example of how the market is so much bigger than the Fed. And dollar shortages will cause problems for those wishing to buy more as a hedge against a devaluation of their own currency. With the inability to hedge they could find themselves unable to fully service their loans and that of course will hurt the banks. It's a global economy and a global financial system and the Fed should be fully aware of the problems they're creating on a global scale. But once again this is a good example of them being book smart and common sense stupid, just as they've demonstrated to us repeatedly since Greenspan's days at the helm. How this will all play out in the coming years is anyone's guess but there's very little likelihood it will play out well.
Even our own economy is very likely unable to handle rate increases. Too many economists see numbers indicating the strengthening in the jobs market but too few seem to notice or care that these jobs are mostly in the low-wage sectors. Consumers are once again at record levels of debt and higher interest rates are going to kill the engine of our economy -- the consumer. Many are looking positively at the idea that the Federal government will spend more money next year, money that it doesn't have, since they see it as a great way to boost the economy. After all, according to economists like Paul Krugman, we're simply paying the interest to ourselves, disregarding the fact that it's still money that was created out of thin air that needs to be paid back and we don't have it.
When people, companies and countries reach the level of debt we now see, borrowing more creates a tipping point and even for the government that can simply print more money it's been shown that more debt produces fewer positive results. We're trying to fly the airplane behind the power curve, which is the point where more power is needed in order to hold the airplane up while slowing further. It's taking more money to keep our economy flying but we're now behind the power curve and close to stall speed. The Fed is not helping.
The concerns mentioned above are of course down the road and if there's one thing we know about the stock market is that it disconnected itself from reality a long time ago. So we stick with short-term indications to help us figure out if the rally/decline will continue or if instead we're setting up for a reversal. At the moment, even though the rally could continue, we're seeing a plethora of signals that warn us of an impending trend change. Sentiment has swing far over into the bullish column and now dangerously so.
The CNN Fear & Greed index has shown a large and fast move from extreme fear in the beginning of November to extreme greed currently. Not only is it a dangerous time for bulls when too many become bullish (the market can simply run out of buyers) but it's also the rate of change that is dangerous. There's been no time for the market to "breathe" and let traders in and out of trades, and it's that "breathing" in and out that makes for a slower rally but a more committed one (longs have been tested with pullbacks and are committed to the upside). This northbound train has been on the express route with no stops along the way and when it stops we're going to see everyone trying to squeeze through the little doors to get out just about the time someone yells "FIRE!"
CNN Fear & Greed index
The market is overbought and overloved and we're seeing some short-term bearish divergences on the charts as the momentum slows. But all of this is not a rally killer today; these signals simply warn us not to be complacent about the upside and instead start looking behind you for possible trouble (like a bear on the rampage).
Because of the significance of the pattern for the RUT I'll start tonight's chart review with this index. I often talk about the RUT being a good "sentiment" index, showing us when investors are feeling bullish (risk-on) and when they're feeling more fearful (risk-off) and the rally off the November 3rd low showed us investors were clearly feeling frisky. The RUT led the charge back up the hill and while the RUT's pullback from last Friday could simply be a breather before at least one more charge against the stone wall it ran into last week, the risk here is that its rally completed last week.
Russell-2000, RUT, Weekly chart
The wall that the RUT ran into, or nearly so, is the trend line along the highs from 2007-2014-2015, currently near 1400. That continues to be upside potential if the RUT can push at least a little higher than last Friday's near 1393. It would be more bullish above 1400 but I'd be careful about a head-fake break. In addition to the trend line there is a price projection near 1392, which was achieved with last Friday's high. This is the 127% extension of its previous decline (June 2015 - February 2016), which is a common reversal level. With that price projection lining up so closely with the trend line I think it's going to be very tough resistance to break through. As mentioned on the chart, this trend line fits as the top of a bearish megaphone pattern (a topping pattern, which often is the left half of a diamond topping pattern). The bottom of this megaphone will be near its May 2011 high at 868 in April 2017. That's not a prediction but it is the vulnerability for price in this pattern (or it could take longer to go lower to the bottom of the pattern).
Russell-2000, RUT, Daily chart
Today's decline was a strong break of the uptrend line from November 3rd, which obviously looks bearish. But another bounce back up to a minor new high, for a back-test of the broken uptrend line, remains a possibility. That would also have it testing the top of its megaphone pattern shown on the weekly chart above. The RUT has dropped back down near a shorter-term trend line along the highs from July-September, currently near this afternoon's low at 1354, and then the next support levels would be it November 25th high at 1347 and then its 20-dma, currently near 1341 and climbing. But as is true for several indexes, the pullback from its recent high is only a 3-wave move and for the RUT it nearly achieved two equal legs down, at 1353.58, with this afternoon's low at 1354.07. That sets it up for the next rally leg if that's what's coming. This is one reason why the bulls need to step back in right away Thursday morning and prevent the bears from taking the ball back.
Key Levels for RUT:
- bullish above 1393
- bearish below 1347
Another reason to question the rally, or at least not get complacent about it, is that it isn't supported by market breadth. The chart below shows the advance-decline line for the AMEX since April. It peaked in September and is so far showing a lower high vs. the higher price high for the RUT. This is typically seen in the last leg of a rally and it supports the need to be wary of how far this rally has stretched without the underlying support of all the stocks in the index.
Before moving on to my regularly updated indexes I wanted to show a weekly chart of the NYSE Composite index and the Wilshire 5000 index, which are both arguably better indicators for the broader market. The weekly setups for both of them are for a trend change, back to the downside. They both reversed where the bears needed them to reverse and now the next couple of days will tell us whether or not the bears will capitalize on the setup.
NYSE Composite index, NYA, Weekly chart
What I find interesting at the moment is how well NYA reacted to a price projection at 11254.90, two trend lines defining its rally from February and its previous high in May 2015, at 11254.87. A price projection for two equal legs up from June, at 11254.90, is only 3 cents above the May 2015 high and it was achieved yesterday with its high at 11256, essentially just a point higher. Today's decline has it pulling back from this price-level resistance as well as a trend line along the highs from April-August and a back-test of its broken uptrend line from February-June, both of which cross this week near 11255. From a technical perspective we have multiple reasons to look at 11255 as strong resistance and today's pullback could be the start of something bigger, especially if today's selling is followed by more (instead of just a 1-day post-FOMC reaction).
Wilshire 5000 Total Market index, W5000, Weekly chart
The reason I mentioned the price projection for two equal moves up from June is because of a type of wave pattern that I'm watching for the rally from February. It hasn't been looking impulsive, which would suggest a stronger rally potential, and has instead looked corrective, which suggests only a bounce correction to its previous decline (into the February 2016 low). Some indexes do look more bullish but overall I'm not getting a strong bullish wave pattern. So far the W5000, I'm looking at two 3-wave moves up from January (a lower low in February does not negate the idea) and the first one is up to the April high and the 2nd 3-wave move is from June. The two 3-wave moves are equal near 23842, which was nearly achieved with Tuesday's high at 23802. For the 2nd 3-wave move up, two equal legs points to almost 23786, which was achieved this week. Another projection is the 127% extension of its previous decline May 2015 - January 2016, at 23621, was also achieved but now lost with today's decline. The 127% extension is important to watch because it's often a failure level for a correction.
S&P 500, SPX, Daily chart
A level that I talked about last week, with my discussion about the Gann Square of 9 chart, was 2271 and 2273. SPX 2271 is aligned with the March 2009 low at 666.79 while 2273 is square to March 6, the date of the 2009 low. Yesterday's high was 2277 but it closed at 2271 and today's high was 2276 but it closed at 2253 and it remains possible the 2271-2273 area will hold as resistance to any further progress. I remember back in October 2007 pretty much pounding the table about 1576 being an important number on the Gann Sof9 chart since it's on the same vector as the October 2002 low so we had alignment for the completion of the 2002-2007 cyclical bull. The high for SPX in October 2007 was 1576 and now we have the same alignment for the completion of the 2009-2016 cyclical bull (except with a 4 to 6-point throw-over if we don't get another new high). It's uncanny how this Sof9 chart works and right now it's telling us the bull just bought the farm and the bears are coming out of their caves. Only time will tell us whether or not it's true.
With today's low at 2248 SPX is back down to its broken/recovered uptrend line from February-June so we'll see if it holds as support. The bears need to see SPX below 2240 to give it a more significant break but it will still be the form of the pullback/decline that will tell us when a trend change has occurred. At the moment the pullback can be argued to be corrective but a sharp decline tomorrow morning would make it look more impulsive. Then we'd know to start looking for the subsequent bounce to short. For now the trend is still up but based on what I mentioned above, a break of the uptrend line from November 4th, near 2245, would trigger sell alarms (someone yelling "FIRE!" as people are trying to get off the northbound express train).
Key Levels for SPX:
- bullish above 2278
- bearish below 2240
S&P 500, SPX, 60-min chart
The SPX 60-min chart below gives a closer look at the trend lines currently in play. In addition to the uptrend line from February-June, near this afternoon's low at 2248, a trend line along the highs from November 10-25, near 2252, looks to be supporting the pullback. In fact it can be viewed as a back-test of the broken trend line and now all the bulls need is a bullish kiss goodbye to launch the next (and likely final) rally leg, potentially up to 2300. Below 2240 is when the bears would be in a little better shape (I never say in good shape because to be a bear is to expect sharp gashes from the bull's horns). It's how much steak a bear can eat before getting gashed that determines whether he lives or not.
Dow Industrials, INDU, Daily chart
With this week's highs the Dow achieved a price projection at 19904, which is where its rally from November 4th has two equal legs up, with the half-way point being the small sideways triangle that it formed November 14-18. A measured move like that is often a reversal level but it's too early to tell if it will lead to just a pullback before heading higher or something more bearish. The Dow has been strong (defensive play?) and needs to drop a lot further, at least below 19400, before the bullish pattern could be in trouble. But it's the need for an impulsive (5-wave) move down to tell us a trend change has been made.
Key Levels for DOW:
- bullish above 19,904
- bearish below 19,400
Nasdaq-100, NDX, Daily chart
Unless NDX blasts off to the upside from here it's looking like a choppy move up from November 4th for what looks like an ending pattern. Above Tuesday's high at 4960 would be bullish but at the moment it's looking like a failed attempt to bust through the top of a parallel up-channel from November 4th and a trend line along the highs from July-October, near 4938. But overall, the pattern is too choppy since August to give me any clear sense of direction. Follow the others.
Key Levels for NDX:
- bullish above 4960
- bearish below 4854
If you only like playing the long side and shy away from shorting anything, even buying puts, I think it's time to shift your focus from buying stocks to buying bonds. The bond market has been selling off strongly while the stock market rallied and now it's looking like we could be on the cusp of a reversal for both. If so, you can join the crowd rotating from stocks back into bonds.
Sentiment is ripe for a reversal as well since investors have become strongly bearish the bonds. Speculators held a record net short position in U.S. Treasuries, according to the most recent data from the Commodity Futures Trading Commission. Net shorts in the 10-year equivalent bonds increased to -$72B from -$58B a week earlier, which is the most since 2008. Many are calling the long bull market in bonds dead (I'm not so sure about that but I'm in the minority) but regardless, the sentiment setup is for at least a large correction before bonds continue selling off (and yields pull back).
20+ Year Treasury ETF, TLT, Weekly chart
TLT has dropped down to its uptrend line from February 2011 - December 2013, near 116.50, with today's low at 116.80. We'll soon see if support holds, in which case long against the low would be a long trade that could work nicely for at least a bounce correction to the decline.
Transportation Index, TRAN, Daily chart
A week ago the TRAN shot above two parallel up-channels, from January and June, and then above its November 2014 high at 9310. Yesterday it pulled back to the November high and looked like it was setting up for a bullish back-test. But today it dropped back below its high, which is bearish (potential failed breakout attempt), and is now close to testing the tops of the parallel up-channels that it broke out of, currently near 9190 and then 9150. I have a key level to the downside for the bears to break at 8906 (the November 30th low) but we'd have a bearish heads up with a break below multiple support levels down to its 20-dma, currently near 9077 and rising. There's still bullish potential here but the bulls can't waste much time.
U.S. Dollar contract, DX, Daily chart
The US$ bounced sharply back up this afternoon and made a new high above its November 25th high. At the moment it's looking more like a test of the high rather than something more bullish but obviously some follow through to the upside would help negate the bearish divergence seen on the daily chart. The weekly chart supports higher prices and we could see it stair-step higher into January if it doesn't get knocked back down quickly. If the dollar does continue higher we'll then likely start to hear how much it's going to hurt the profits of international corporations, as well as trouble brewing in other countries and the devaluation issues of their currencies. The Fed will then be pressured to back away from further rate increases.
Gold continuous contract, GC, Daily chart
Gold dropped further today as the dollar rallied but it should be nearing support at a price projection for the 2nd leg of its decline from July. The 2nd leg would be 162% of the 1st leg at 1121, which is now within spitting distance of gold's low at 1136.40 so far. What kind of bounce correction follows will then tell us whether or not to expect lower prices. A choppy consolidation near the low would point to lower and likely down to a test of its December 2015 low at 1045.40. But a stronger bounce, especially if it gets back above 1204, would be potentially much more bullish since the pullback from July is only a 3-wave move and a possible correction to what will become a more powerful rally.
Oil continuous contract, CL, Daily chart
With Monday's high for oil at 54.51 it nearly tagged a price projection for two equal legs in an a-b-c bounce correction off the August low, at 54.94. It had also poked above the top of a parallel up-channel for the bounce but then dropped back below and left a flaming shooting star for Monday's candlestick. The downside follow through today helps confirm a likely reversal back down. It could result in just a pullback before heading higher (above 55 would be bullish) but the choppy ending pattern for its bounce has it looking like it could continue its longer-term decline.
Thursday morning we'll get a slew of economic reports, which the market will likely largely ignore. CPI, Philly Fed, Empire Manufacturing and the NAHB Housing Market index will join the normal unemployment claims data. On Friday we'll get housing starts and permits. I will add that the chart for the home builders is looking bearish following its high in August 2015 and then lower high in July 2016.
The market rallied into the FOMC announcement and then sold off afterwards. Buy the rumor, sell the news. So far it's all been pretty typical but it's what happens the rest of this week that will tell us what to expect into next week and maybe for the rest of the month/year. The pullback from this week's highs (last Friday's high for the RUT) can be considered just a correction to the rally. A rising wedge pattern for SPX from November 4th points to the potential for one more leg up inside the rising wedge to complete a nicer looking 5-wave move. But the RUT has broken down from its rising wedge and it could be the canary that just fell off its perch.
I see upside potential for SPX to 2300 (only 24 points above this morning's high at 2276) but considering the alignment on the Gann Square of 9 chart, at 2271-2273, we might have just put in an important high, just like the one in October 2007. Again, we should know better in the next couple of days. The first thing the bulls need to do is recover from this afternoon's selloff, which is a typical pattern so we'll see if they can do it again. I continue to believe upside potential is dwarfed by downside risk but we don't have any clear signals yet for the bears to jump in. The upside is risky while it's still early to consider the short side. That means both sides should be staying cautious rather than aggressive.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying
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