Don’t Fight the Tape…Don’t Fight the FED. Anyone that’s been with the VRA for a while knows that this is an investing rule that I live by. Following FED Chair Janet Yellen’s high profile speech yesterday to the New York Economic Club, it’s time to take a fresh look at one of my cardinal rules of investing.
Don’t Fight the Tape
The tape….code for “the current trend in the stock market”…can be determined by reviewing the action, or “ticker tape” (for our old school investors), of the major equity indexes. Today, we see a HIGHLY mixed bag in the tape. First, the positives:
Both the S&P 500 and Dow Jones have broken above their 200 day moving averages…a key level for trend watchers…with both having stayed above the 200 dma for 9 days. Granted, both averages are hovering just 1-2% above their 200 dma, and the move higher has come on very light volume, but nonetheless, the move above the 200 dma has taken place.
Take a look at this chart on the S&P 500. I’ve inserted two blue horizontal lines. The lower line shows where the index lies today. The upper line marks the resistance, or selling pressure, that has (since last year) consistently turned stock prices lower. This “death zone” as Twitter follower @stocksurfer10 pointed out yesterday, remains the biggest obstacle to long term stock market bulls.
Most importantly, it’s this exact level of resistance that has resulted in two massive sell-offs…both since August. First we had the “flash crash” in August which resulted in a one day, 1000 point sell-off in the Dow. Of course, the most recent bear market decline took 15% off of the Dow and S&P 500, from the November highs to the February lows.
Folks, no one can dispute the following statement…and I believe it is a most important market reality. The pattern in stock markets is one of “lower highs and lower lows”…going back to May 2015…and it remains as one of the most heavily bearish technical formations around.
Final note on this chart: as the market topped in November, notice what happened around the 200 dma (the red line moving average). As gravity took over, the major indices crashed through these lines once again…causing massive losses for the average stock market investor. The VRA nailed this move lower. We had more than 150% in realized profits, plus another 200% in paper gains…paper gains that have not only vanished with this move higher, but that have now turned into losses from our market short positions.
Now, the Negatives:
You know these well…I’ve been reminding you of the negatives daily…but Mr. Market seems to care less what I think, at least for the short term.
Instead of posting a chart, consider the following: not only are the Nasdaq, Russell 2k and major sectors like banks and energy, trading beneath their 200 dma, but internationally it’s pretty much impossible to find ANY stock markets that are trading above their 200 dma. Whether we’re talking about China, Japan or Europe, each market continues to languish beneath the levels that would signify a reversal is on the way.
Globally, the “tape” continues to flash a major SELL signal. The question is, will US markets….plus the FED’s money spigot…be enough to bring these global markets back into bull market status? Will the move above the 200 dma, in roughly of our indexes, be enough to sustain a continued move higher?
Here’s the deal. Unless corporate earnings can reverse themselves, and the 4 consecutive quarters of negative earnings growth, this move higher is on borrowed time.
Don’t fight the tape…we’ve covered that one. Now, what about fighting the FED?? This is where it gets a bit confusing. First, the FED raised rates in December. Following that meeting we know what happened….stocks dropped 15-50%…depending on the global market you’re looking at.
“Don’t fight the FED” made itself known very, very quickly.
Since the December rate hike, the FED has backed away aggressively from their “higher rate” stance….culminating in yesterdays speech from Yellen, where she essentially said “we will not raise rates again this year”…at least thats what the markets heard. It’s an election year, after all…and this most highly politicized FED seems hell bent on both sending Obama’s stock market on a high note, as well as doing their best to get Hillary elected. “See how the stock market did under BHO?? Well, a Clinton presidency will ensure at least 4 more years of higher stock prices!” Make no mistake…this is absolutely a part of the action in the markets today. It’s certainly on the lips of every top strategist that I know.
Bottom line; the FED wants higher stock prices….of this there can be no doubt. Yellen’s speech made this crystal clear, with numerous stock market references. At the same time, she referenced global markets over and again as well. And this is what infuriates long time central bank watchers….nowhere in their mandates will you find anything about the FED’s role in the US stock market….nor will you find anything resembling a mandate to prop up global stock prices. Yet…this is EXACTLY what Yellen’s FED has taken on. An abomination that will boomerang right back to them…the only question is “when”.
Until then, central banks globally have cut rates more 600 times since 2008…this is “don’t fight the FED” for sure. The question is, how long can this monetary insanity continue before currency inflation evolves into hyperinflation?? BTW, this is why we own PM’s and the miners…and why you should continue to buy them on every pullback of size.
In short, these past 7 weeks have sucked. Yours truly is a very sore loser. Over the years I have taken a great deal of pride in “bashing Mr. Markets head in”…something that the VRA has been able to achieve year in and year out…going back to our inception in 2003. My job is to make you money…I have failed miserably at this of late.
I also know that past gains don’t help you now…and they do not change the fact that I’ve been on the wrong side of this move.
Here’s the deal; tomorrow marks the end of the first quarter….and with it, the window dressing that we are seeing right now. Should the markets tell us that they are ready to break through the “death zone”, as referenced above, we will take our losses and reposition. I continue to be HIGHLY skeptical that this will be the case. Instead, look for a major corrective move lower…likely in the next few days…it’s this correction that will tell us the markets next move.
I will be updating more frequently going forward…our biggest gains come from the markets surprise moves…I expect that we are about to see the current “capitulation” reverse…with a move lower of more than 1000 points in the Dow.
Until next time, thanks again for reading…stay frosty.