A look at how a few markets are setting up pre-FOMC.
The charts are what they are, but we are dependent upon what the Fed may or may not put out there on Wednesday. I would put the odds of a rate hike at just this side of zero. But they are free to leave forward looking wording as is or do a little tweaking from the currently ultra dovish stance toward at least opening a discussion for rate hike expectations for June.
US and global markets have rallied for many weeks now and certain inflation indicators have bounced. These conditions should have at least gotten the attention of some members. As noted in the weekend report, it depends on how they want to manage perceptions. As of now the market perceives that they want inflation.
TIP vs. TLT and the 10 year yield indicate elevated but not breakout inflation expectations.
The 10yr-2yr yield curve has been readying itself to change the short-term trend as it sneaks above the 50 day moving averages. One signal of long-term yields rising faster than short-term yields would be inflation.
In NFTRH 392 it was noted that the gold and silver stock sector had not even begun to correct. Yesterday was a down day and yet that is still the case. Notice that GDX is still well above the daily EMA 20, which supported the consolidation in March. The EMA 20 is the bare minimum for a pullback, let alone a correction, and has not even been registered. The same goes for GDX’s fellows, GDXJ and SIL (EMA 20 not shown).
My plan where these are concerned is to stay balanced and stay conservative. I am not trying to make money long or short during FOMC week. I am trying to maintain balance between holdings (PG.to was sold and the relatively conservative CEF, SLW and SAND increased with the proceeds) and temporary short/bear positioning. If the precious metals were to rally hard into FOMC, I would increase caution. So it is good that they are not (so far). If the miners drop to the EMA 20s pre-FOMC, I will consider reducing hedge positioning, using cash to manage risk instead. Remember, my situation includes a long-term gold position not shown in weekly reports. So I am nowhere near fully hedged.
We have been noting that commodities have made a bottom of some kind. So far, it has been a short-term bottom. But this constructive daily chart of CRB would turn the uptrend to a longer-term one if CRB takes the SMA 200 and holds it. Any coming short-term low should hold the SMA 50 (higher low to early April) to perhaps refuel CRB for a potential 3rd higher high and a new trend.
The stock market, like the items above, hangs in the balance of the Fed perceptions game. SPX MACD and RSI indicate an exhausted market. But as noted in recent reports, there are bullish and bearish things going on in the broader market. That fading momentum could be a pause to refresh or a precursor to some pretty dramatic downside. Right now we should let the market show us its hand, as the Fed shows its hand on Wednesday.
Given the seasonality, sentiment and waning momentum, I’d continue to be careful and balanced about the stock market. Inflation is what it needs, because it sure is not running on valuation, corporate earnings or forward projections.
The VIX bounced 6.5% yesterday and is in a stance from which a bounce can continue.
The weekly chart advises again how vulnerable stocks are to a would-be bout of volatility. Any Fed rewording could tweak volatility.
As for global markets, let’s review the emerging markets, which would be a primary beneficiary from USD-weakening Fed policy (ref. NFTRH 392’s daily chart of USD that looked constructive for a bounce). Maybe the EM’s can be a guide for commodities, because they are well above the SMA 200, but have now drooped down to the EMA 20. Precious metals stocks and commodities are still well above their EMA 20s.
EEM vs. SPY continues to up trend during 2016, bouncing with inflation expectations. But I do not like the ugly MACD on this ratio. The ratio (and the EMs) would probably break down if the fed decides to mop up some inflation expectations. We have noted by weekly charts in the weekend reports that the EMs are entering long-term resistance zones.
Bottom Line
FOMC statements to date have given markets reason to believe that the inflation creeping into the system is a-okay with the Fed to this point. Indeed, the chairwoman has made comments that seem adversarial to the US dollar. In other words, the Fed would like us to believe that while Good Ship America is fine, they are batting would-be effects from troubled global markets. But many of these troubled global markets have been bouncing long and hard and that story is getting stale.
I continue to believe that inflation is a viable tool that policy makers use in order to inflate away some of the large debt overhang. But these FOMC rituals are for the investing public’s consumption and the market has called them on their inflation and raised them one breakout in silver.
I’d continue to expect inflationary operations but maybe not all in one big gulp. If the Fed wishes to tamp down perceptions in the short-term it can easily redo some wording and let the markets react accordingly. In the span of 1 month, certain inflation barometers have bounced significantly. This is not to say they will change tack, but to be open the possibility of it.
Caution is advised until they show their hand.
