*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
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Stock index & news
Fed rate hike.
The Fed hiked rates today (as expected), and the S&P fell a little. You typically need to wait a day or two for these things to settle down. Sometimes the U.S. stock market will initially fall on the news and then reverse the next day. Don’t read too much into today’s price action. Wait for the dust to settle down.
This is the fourth hike in the current rate hike cycle. Let’s see how various markets reacted to the previous 3 hikes.
*Don’t read too much in the patterns. There have only been 3 hikes prior to this one, so that’s not enough cases to draw significant inferences.
March 15, 2017
The S&P went up on this day. Then it fell 2.8% in the next 8 days.
The U.S. dollar index got hammered on this rate hike and fell significantly over the next 8 days (just like the S&P). Here’s the chart:
The 10 year Treasury yield fell on this trigger, and that started the 10 year yield’s downtrend. Historically, the yield curve tends to flatten when the Fed starts to hike interest rates. So it’s not really surprising that long term rates will sometimes fall when the Fed hikes rates. Here’s the chart:
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December 14, 2016
The S&P fell on the day of this rate hike. The S&P consolidated throughout the rest of December and fell a meager 1.9%.
The U.S. dollar spiked on this rate hike. However, that was basically the U.S. dollar’s top. Over the next 3 weeks, the U.S. dollar made a flat top with marginal new highs.
The 10 year yield spiked on this news as well. It made a new high the next day (December 15), and that was the top for yields.
December 16, 2015
This was the first rate hike of the current rate hike cycle. The S&P topped on this day, made a pullback, bounced, and then fell 13% over the next 2 months.
The U.S. dollar swung wildly on this day. It gapped up the next day and slowly grinded higher over the next 1.5 months.
The 10 year yield went up on this news. Then it made a pullback, bounced, and crashed.
Overall, rate hikes have been much more bearish for Treasury yields than stocks or the U.S. dollar.
Bond king Jeff Gundlach did a webcast yesterday. We don’t trade bonds or really follow the bond market, so his insights are useful.
He doesn’t think the 10 year yield will reach 3%, but can it exceed its March 2017 high (which is a big resistance).
3% is a key resistance level (i.e. “higher highs”). Here’s a monthly bar chart.
In other words, Jeff thinks that interest rates will remain range-bound for the rest of this year.
This ties in with the idea that oil will remain range-bound this year. With global supply (primarily U.S.) rising, it’s unlikely that oil to soar past $60 this year. Oil impacts headline inflation, which drives interest rates.
Jeff also said that as the Fed raises interest rates, historically the yield curve starts to flatten. That’s what we’re seeing right now. A flattening yield curve isn’t a problem for the stock market until the yield curve inverts.
Buried under the Fed’s rate hike news today was U.S. economic data. Retail Sales was disappointing (down -0.3%) and so was CPI (0.1% vs 0.2% expected). Even when you look at Retail Sales ex-gas, Retail Sales still fell -0.1%.
However, the year-over-year change in Retail Sales growth is still decent. That’s what long term investors should focus on. Chart from CalculatedRisk.
Oil is falling
After a surprise build in inventories, oil crashed today. Oil has almost reached its May 5 low of $43.76. Is oil close to bottoming? Who knows. We don’t trade oil. We don’t think that oil will break below $40.
Not much has changed. Don’t read too much into today’s wild swings. Let things settle down.
- Our model says that this is a big rally in a bull market.
- Despite our model’s bullishness, we’re sitting on 100% cash. Here’s why.
- We’re waiting for the next 6%+ small correction.
There was nothing noteworthy in the sectors today. Large cap Dow went up because the consumer discretionary spending sector went up today.
We follow 3 sectors: energy, finance, and tech. Energy fell because oil fell. Tech fell as well.