Overview
“No one knows whether this process will lead to a recession or if so how significant that recession would be,” said Fed Chair Powell after the FOMC raised rates by 0.75% to 3.25%. A truly astonishing statement that shows that the Fed is battling forces beyond its control, but hitting them hard with the only hammer they have (higher rates).
The FOMC raised its year-end Fed Funds target to 4.4%. Thus, their year-end target has rocketed from 0.9% to 4.4% in just nine months, which seems driven more by emotion than analytics.
The terminal rate was set at 4.6%, so we will not be far from the cycle’s peak if we end the year near 4.5% after yet another jumbo 75-basis point hike.
The market sold off after the Fed meeting as concerns mounted that the Fed wants to break the economy.
Key Question
Where is the low in this market? It could be a long way away since there is too much uncertainty. We use Fibonacci extensions and Elliott Wave theory to make some guesses, but be warned, these tend to produce a false sense of precision.
Performance Summary
A terrible market week, with both bonds and stocks falling sharply. As we have pointed out, the market will not stabilize until bonds find support, and there is no sign of that yet. The US 2-year note, closely tied to FOMC strategy, weakened last week. This week, the long end gave up the ghost as well.
The FOMC has spooked the markets, as traders are now racing to raise expectations for the Fed Funds “terminal rate.” See, for example, how quickly the expectations have shifted in just a week.
The sensitive net bull/bear balance has been useful for identifying key momentum surges, and it remains pinned below -60, indicating a strong push by the bears.
The major groups in the S&P-500 index are in strong downtrends (with Chande Trend Meter < 20). It shows that the market is taking the recession threat seriously. Today, a downside gap in the XLE chart captures the market’s fears of a recession.
Since bonds are also getting crushed, the only hiding place is to be short the market. Here we ranked over 3000 ETFs using CTM, and only “short side” or bear ETFs have strong uptrends.
Projecting Lows
A fair warning: these projections are guesses at best, and the market’s response depends entirely on incoming inflation data.
As a first guess, one should look around the June lows for the first layer of support (see chart in the overview above).
I used two different approaches from technical analysis. First, looking at the S&P-500 chart, one can count four waves lower and use them to project the fifth wave down to the “final” low. So this approach focuses on projecting the amplitude of the fifth wave.
There is a cluster in the range from, say, 3475-3625, down -25%~-28% from the January highs, broadly consistent with shallow-recession declines. Even the lower bound, around 3200, is within the range of historical, recession-driven drops.
Another approach is using Fibonacci extensions using various points in the decline, which produces similar answers to the Elliott wave approach (which also uses Fibonacci projections). The two critical areas of support are around 3400 and 3200.
The actual timing of the low will depend on incoming data, but broadly speaking, I expect one between now and next August. Naturally, I could be wrong if inflation does not come down quickly. So the first place to look would be a little before or a little after the upcoming election. Another would be after the last FOMC meeting of the year (December 13-14). Finally, the probability of a bottom will increase rapidly once we know that the Fed has stopped increasing rates (see the chart of the implied Fed funds rate above).
Wrap-up
My posts should give you a good starting point, with context and suggestions if you like to research. Then, you can visit my website, chandeindicators.com, for more information and ideas. I hope you stay tuned and help by subscribing and recommending it to your friends and colleagues.
Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, and entertainment, not for investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.