I'm not sure whether it was the late Marty Zweig or his buddy Ned Davis who originally coined the phrase, but it appears that after yesterday, anyone long the stock market may now officially be fighting both the Fed and the tape!
Investors came into Wednesday in a hopeful mood. And at one point, the Dow Jones Industrial Average sported a gain of nearly 400 points on the session. This was no small feat given the fact that the tally on the Dow's dance to the downside since December 3 stood at more than 2150 points and the venerable index had fallen -12.1% from the late-September high. And when glancing around at the rest of the major indices, that number actually looks good compared to the drop of -13.1% seen on the S&P 500, the dive of -16.03% on the NASDAQ, the decline of -15.8% on the S&P Midcaps, and the -20.9% hit the Russell 2000 had endured.
Nevertheless, the thinking was that stocks were oversold (this is true), sentiment had become bleak (also true - and usually a good thing from a mean-reversion perspective), valuations had improved (check), the government was going to stay open (it turns out the jury is still out on that one), and that Jay Powell was going to usher in what was sure to be a stunning Santa Claus rally.
There was hope that what is commonly referred to as a face ripping rally would propel the S&P 500 back into positive territory for the year and everyone could enjoy their New Year's Eve parties knowing that their 401K's had grown a smidge in 2018.
But a not-so funny thing happened on the way to the stock market party. Yea, that's right, it didn't happen. Instead of the expected Kris Kringle imitation, Jay Powell donned his Ebenezer Scrooge costume and queued up When Doves Cry as his theme song for the post-announcement press conference.
Sure, Powell used the phrase "data dependent" (isn't that what we all wanted a month ago?). And yes, he did kinda, sorta acknowledge the concept of #GlobalGrowthSlowing with his "troubling cross currents" verbiage. But the bottom line is the new Fed Head flat-out bonked on the idea of "one and done," which is apparently what the trading computers wanted to hear.
At first blush, Powell's commentary seemed quite logical. Heck, the economy in the U.S. is doing just fine, thank you. Unemployment is low. Wages are growing. And although everybody knows that the current rate of inflation isn't likely to persist, the recent data did provide Powell & Company "cover" to go ahead and hike rates again by 25 bps yesterday. If for no other reason than to prove their independence from the Twittershpere.
On that note, the President's continued public and not-so subtle disenchantment with Fed policy may have contributed to the Fed Chair's less than dovish tone. Instead of talking about being "just under" neutral and perhaps reconsidering the plan for rate hikes in the coming year, Mr. Powell stuck to his independent guns and said his group would do what they needed to do.
The Machines React
The markets (oops, I mean, the trading algos) received the message loud and clear (and without the assistance of a single tweet from members of the FOMC). Within an hour, the Dow shed nearly 900 points. Yikes.
The good news is that the market then stabilized and for once, didn't finish at the lows of the day. And while there was still time in the session for things to get really and truly ugly, the Dow actually advanced 160 points off the low. So, as some are saying, it could have been worse. Small victories, right?
This sets up the hope that traders will come to their senses, "rethink" the Fed's intention, and trigger the kind of day-after recovery that has occurred recently once the post-Fed dust has settled. One can hope.
Then again, it is important to recognize that the technical damage done to the market indices is immense. Make no mistake about it; the action is bad - very bad. Major support has been obliterated. There is now a series of lower highs and lower lows. Stocks can't rally on "good news." Moving averages have broken like toothpicks (and now become resistance). And lest we forget, every single intraday "rally" (a term used loosely these days) has been sold - and sold hard.
In speaking to a couple of my fellow gray-haired colleagues yesterday afternoon, the thoughts were the same. This tape is horrid and something we haven't seen in a very long time. This isn't like 2015/16 or even 2011. No, as I opined to one of my advisor clients, "This is an old-school bear market playing out with new-school trading computers."
So, where do we go from here? The easy answer is down. The logical answer is, up (we're due for a bounce at the very least). The problem is there is now significant resistance overhead (meaning LOTS of folks would LOVE to reduce exposure at higher levels) and a distinct lack of potential bullish catalysts. Insert long sigh here.
But with a market that is THIS oversold and sentiment THIS negative, there is always hope for a counter-trend move - ESPECIALLY at this time of year. So, in closing, I'll reuse the title of my last missive, Here's Hoping Santa Makes The Trip This Year. Fingers crossed. Because if Santa doesn't show, investors may enter 2019 fighting both the Fed and the tape.
Look at life through the windshield, not the rear view mirror. -Byrd Baggett
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.
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