The big news this week is that the Hawks at the Fed are circling the market. Hawks are raptors, carnivorous hunters. Will exhausted and weakened stock bulls be the special on the menu in 2017?
US equities took a breather from the Trump bump, with the S&P 500 closing down fractionally this week. This muted action came after the Fed jacked rates by ¼ % this week and added some very Hawkish interest rate forecasts for 2017.
The Fed expects to do another 3 rate hikes during 2017. The adage coined by market guru Edson Gould is that when the fed hikes rates three times, the stock market stumbles. Gould, one of the best market timers ever, emphasized that the details shift but his big ideas don’t.
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Of course, the bigger question is whether an old-time market timer’s theory is still relevant? We think so, because at some point yields will start to look attractive relative to high priced stocks. The 64 trillion-dollar question is does the backing off quantitative easing count as one of those three steps or do we have to wait?
For now, most of our risk on indicators are still positive but the S&P 500 versus utilities threw out a warning by the end of this week.
The panic out of bonds in the past few months culminating with the Fed action this week has our momentum reading rung out on the down side. Price action is sitting on the long term 80-month moving average and it’s the last vestige of support for the 30-year bull market in bonds.
Also, supportive to a counter-trend rally in bonds is that Portfolio managers are extremely underweight. That suggests at least a bounce near current levels might be a smart contrarian play.
Along those lines, is Gold, which is most sensitive to rates and anxiety levels. Gold is sitting on support on our momentum indicators. This indicates it might also be due for a bounce after its recent disappearing act. However, breaking recent lows would indicate much bigger problems for gold bugs.