We did not get a “hawkish rate cut” yesterday…as the Fed signaled that they are going to keep interest rates low until Bill Belichick retires…which means they’ll keep rates low forever. (Sorry Don Shula, your record for most career victories is going down. You never should have called Bill Belichick, “Coach Belicheat”. Now Bill wants to clobber your record.)
Oops, we got off track there…our apologies……Anyway, to be honest, even though the vast majority of the opinions we’ve read & heard since Chairman Powell’s press conference have said it signaled that the Fed is much more dovish, we just don’t believe that is was quite as dovish as the consensus seems to think. Was anybody really thinking the Fed was going to tighten ANY TIME soon??? We don’t think anybody was realistically looking for an “Election Year” rate hike, so we’re not sure why this news was seen as such a big deal. People can say that a rate hike was taken off the table all they want, but we would argue that it was ALREADY off the table…for AT LEAST the next year!. Besides, the Fed also indicated that it has put further rate cuts on hold for the foreseeable future. Is that really something that should be seen as uber dovish???
More importantly, the stock market’s reaction is also telling us that it wasn’t an uber dovish development. Yes, the stock market DID rally, but a 0.33% advance on 3.1bn shares…and breadth that was barely positive…is not the kind of rally screams “breakout” at the top of its lungs.
Don’t get us wrong, we’re not trying to say that yesterday was not a good day for stocks…we just want to keep the situation in perspective. In other words, a move to a new slight record highs IS a positive development. It’ just that we’re still going to have to see more upside follow-through before we can confirm that this move above 3,000 on the SPX is going to hold.
If there IS one definitive conclusion we can derive from yesterday’s developments, it’s that the Fed has put the ball firmly in President Trump’s court. They’ve cut interest rates THREE times…and they’ve begun a QE program (even though they say it’s a non-QE program). What more could Mr. Trump ask for????.....In other words, if the stock market declines in any meaningful way over the 12 months leading up to the 2020 election, President Trump won’t be able to blame the Fed. Yes, he WILL TRY to blame them if a correction takes place…but it won’t work any more…now that the Fed has COMPLETELY reversed itself over the past 10 months.
Moving back to the markets, we’ve talked a lot about the “critical juncture” that several different markets are facing right now…and we mentioned (above) how the stock market needs a bit more upside follow-through to confirm that it has resolved this “critical juncture” to the upside. However, we’d like to focus on the dollar this morning.
The DXY dollar index has rolled back over since Mr. Powell made his comments yesterday…which has taken it back below its 200 DMA…and down to its lows from August, September and earlier this month. Therefore, any downside follow-through will be negative for the greenback…..However, as we’ve been saying recently, the more important support level is the 96 level (the lows from March and June). Therefore, we don’t want to say that a drop below 97 on the DXY will confirm a change in trend, but it could/should still have an impact on several other markets (like helping emerging markets & commodities to rally further). If (repeat, IF) it continues to fall…and takes out the 96 level, it will have an even more important impact on those markets.
In other words, the biggest impact Chairman Powell’s comments had yesterday was in the currency market. Yes, it is always important that we all try to figure out what the Fed’s actions will mean for the U.S. stock market (and other domestic markets). However, we also HAVE to determine whether it will have an impact on some other global markets…many of whom have badly underperformed the U.S. markets this year. Many of these markets are showing signs of outperforming over the past two months…and if the dollar continues to decline, it’s something that could become much more prolific. Therefore, the most important item we should be watching right now…just might be the dollar. If it’s trend changes, it’s going to throw a wrench into the works of all those sizeable “long U.S. asset” positions that exist around the globe today!!!! (Chart attack
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.