Welcome to highly volatile times of the stock Market!
The underlying trend is now getting bearish, especially in light of the market’s volatility during last week’s Fed announcement. Despite the announcement of no interest rate increase we had a massive sell off on Friday and, we got stopped out of our positions with a gap at the opening.
Financial chatter over the past several months is dictating a need for higher interest rates. Instead there was no change. The last rate increase from the Fed came on June 30, 2006 and, it was a modest 25 basis point. However, it followed 16 previous quarters of one percent increases from every fed meeting since June 30, 2004. That final rate increase pushed the overnight rate up to 5.25%, and the prime rate up to 6.25%. It was the final straw that broke the camel’s back or, in this case the bull’s back a year later. At that rate, institutions had a better place to put money besides the markets where their principle was guaranteed and the rate of return of 5-6% was actually pretty reasonable. That will be Treasuries.
The bull market could have ended much sooner. However, during 2004-2006, the Fed kept the burner on low but used regular rate increases to cook the economy. They could have turned the burner on high and raised rates with 0.5% increases, but had they done that, the bull would have ended within a year. But it isn’t the market’s direction the Fed is typically focused on, but rather inflation. And when inflation gets traction, it can be very tough to get it back under control.
That’s why the Fed tries to anticipate inflation’s speed. Unfortunately, they almost never get it right, and their efforts end up pushing the economy into a recession by the time they end rate increases or soon thereafter.
Markets however are better predictors than the Fed. Bear markets almost always start well ahead of a recession. They’ll begin when Fed rates start to make Treasuries more appealing with better rates of return and guaranteed safety than the stock markets can offer.
So while everyone frets over rate increases that are coming, just know, early increases are likely to be a slow cooker approach that Janet Yellen says will be “accommodating”. With a small 0.25% increase, markets are likely to settle down afterwards, and then remain bullish. But that is not the case these days.
At this juncture the very smart big money is in cash and increasing that amount at every market rally. Our US Sector Portfolio which is a volume based trading is clearly indicating their position of cash.
Signal Pages Snapshots
U.S. Index Trader:
Canadian Index Trader:
US Equity Sector Portfolio
US Bond Sector Portfolio:
Please contact us for any explanation. We would gladly help you!