Market Summary
A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. Last week we said, “…after recovering from the market bottom to start the fourth-quarter, the overall stock market has been contained inside a trading range… Expect this trend to continue until after the Federal Reserve interest rate decision in a few weeks…” Despite last week’s market pullback and Friday’s massive drop, you can see in the updated chart below how stocks remain in a long term trading range. However, as highlighted, technical indicators are signaling a market sell-off with momentum starting to turn bearish. Next week is absolutely critical with the Fed interest rate decision on Wednesday and triple-witching option expiration at weeks end. If the market follows up on last week’s downturn it jeopardizes the year-end price recovery.
As reported by the Bank of America, on June 29, 2006,
the Federal Reserve did something it would not do again for (at least) nine and
a half years: it hiked rates by 25 basis points, its 17th consecutive rate
hike. Everyone knows what happened afterwards (approximately a year later the
market topped out and then descended into a bear market). This coming
Wednesday, the Fed is expected to do something it hasn't done for 3,457 days:
hike interest rates, ending the longest period in US history (84 months) of
zero interest rates. How has the world changed in the interim? Some quick
observations from BofA: Back then US housing starts were booming (2¼ million
per annum), a stock market bubble was taking place in Saudi Arabia, another one
was forming in China, no one had heard of “Quantitative Easing” and there was
no such thing as the iPhone. Today, US housing starts are moribund (around 1
million per annum), the Saudi’s credit rating has just been downgraded, Chinese
debt deflation has reduced China’s “growth” opportunity set to babies, tourists
& capital outflows, central banks have purchased a remarkable
$12,400,000,000,000 of financial assets since Bear Stearns, and the iPhone now
powers retail sales. And here is the biggest difference: back then total debt/GDP was 61%, with total
debt just over $8 trillion. Now, it is 104%, with the total US debt just shy
of $19 trillion.
Investment Analysis
Next week is absolutely critical for setting up how the stock market can be expected to perform for the year 2015. If the FOMC announces a rate hike on Wednesday as most pundits expect and signals that future rate hikes will be small and gradual, then that could cause stocks to pop. Investors may interpret the Fed's move as a sign that it is still confident about the economy and job market despite the worries about commodity prices and slowing economic growth overseas. "As long as the Fed hikes rates, there could be a relief rally," said Michael Arone, chief investment strategist with State Street Global Advisors. The S&P 500 and Nasdaq indexes have already fell more than 3% this month. Investors may be pushing the expected start of the Santa Claus rally earlier and earlier each year, similar to retailers putting out their Christmas merchandise the day after Halloween. But the market typically jumps higher at the end December after many traders start holiday vacation. Stocks can have exaggerated moves on low volume. "After the Fed meeting, a lot of big investors are off to St. Kitts or the slopes," Arone quipped. "There will be a lack of liquidity that could drive stocks higher." The chart below confirms that's exactly what happened last year. As noted in the weekly S&P 500 Index weekly chart below, stocks plunged at exactly this time last year, only to recover in the following weeks. If the market does not replicate last year’s behavior and bounce back after the FOMC meeting and option expiration next week that will jeopardize the major equity indexes positive gains for the year.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@theoptionplayer.com
P.S. click on http://www.theoptionplayer.com/
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