The S&P 500 has lost critical technical support at the
200-day moving average and the 2,000 level — putting its post-2011 uptrend in
jeopardy. Many observers pooh-poohed the importance of the technical
"death cross" last week. Turns out to have been meaningful indeed, as
it was a milepost by which to observe the stark loss of market momentum.
Globally, the Shanghai Composite lost its 200-day moving
average — a critical measure of the long-term trend — after authorities had
vigorously defended the line in the sand since early July. Bourses from Japan
to Germany are all wilting. Treasury bonds and precious metals have been on the
rise as investors seek safe havens. And currencies of emerging market countries
from Vietnam to Kazakhstan are under pressure.
The PowerShares U.S. Dollar Bullish Fund (UUP) lost its
200-day average for the first time since last summer. The yen and the euro are
rising, despite aggressive stimulus efforts by the Bank of Japan and the
European Central Bank, as popular currency "carry trades" are
slammed.
There may be no single driver for the decline, but a number
of factors have combined in the context of what had been quiet calm in the U.S.
stock market:
— There's been a multi-month decline in market breadth, as
fewer and fewer U.S. stocks participated to the upside. We have chronicled
this.
— Corporate profitability has been pressured by slowdowns
overseas, the stronger dollar, a tightening job market, and lower energy
prices. We've also noted this.
— China has seen a marked slowdown in its economic data, has
suffered a 32% stock market decline, and conducted a surprise devaluation of
its currency last week.
— Greece is back in the news as Prime Minister Alexis
Tsipras has stepped down ahead of snap elections.
— Tensions are rising on the Korean peninsula after North
and South Korea exchanged artillery fire.
Besides China, the acceleration of last week's decline seems
to have been driven by concerns surrounding the approach of a potential Federal
Reserve interest rate hike on Sept. 17.
We're in the midst of "hike havoc" — not unlike
the "taper tantrum" of early 2013 as former Fed Chairman Ben Bernanke
considered the beginning of the end of the QE3 bond purchase stimulus program.
Will the Fed ignore building financial market turmoil or be
pressured into waiting?
The Fed seems to be tilting toward an earlier rate liftoff
with a pause afterwards (the "one and done" scenario for 2015).
Yellen has tried, unsuccessfully, to play down the importance of liftoff timing
and has said that wage growth and inflation aren't a precondition for the
initial rate hike.
St. Louis Fed President James Bullard, who famously saved
the market back in October during the Ebola-driven selloff by reassuring
investors that the Fed could unleash more stimulus if needed, also raised
expectations of a September hike Friday when he said the Fed doesn't react
directly to equity markets and that he's more optimistic about the global
economic outlook than the market is.
The last time the Fed faced a cliffhanger decision, it
blinked. Will Yellen fold, too?
For investors who have grown complacent in the belief the
Fed will always support markets, this was like an ice pick through the heart on
an already scary day.
The last time the Fed faced a cliffhanger decision, it
blinked. Bernanke delivered a surprise "no taper" decision at the
September 2013 policy meeting; postponing the taper until December, just three
months before current Fed Chairman Janet Yellen began her term.
To answer the question, we turn to the data hounds at Bespoke
Investment Group for their expertise and insights. They have an intraday
S&P 500 price database that lists minute-by-minute price data for the index
going back to 1983.
Bespoke analysts say it has been nearly four years since the
S&P 500 had a day where it was down more than 1.5% in morning trading, only
to finish higher on the day. The last time this happened was on October 4, 2011.
That day was actually the bottom of the 2011 correction, and the index went on
to gain 11.5% over the next month. But trading that day was much more extreme
than it was on Wednesday, so don't draw a hasty comparison.
Will Yellen fold, too? The drop in the dollar suggests
currency traders believe she will.
Yet the selloff in pretty much everything else suggests a
nagging fear the world's most important central banker is about to turn
hawkish, focusing on steady job gains and stable GDP growth while ignoring the
market rout. According to Oxford Economics, the U.S. economy is growing at a 3%
annual rate, which is not too shabby.
Capital Economics believes the Fed has set a "pretty
low bar for a rate hike" and with GDP growth likely to be higher than the
Fed's June projection they not only "think that the Fed will raise rates
in September, but there would appear to be a good chance of a second hike in
December as well."
Analysts at Nomura think differently, and see the odds of
two rate hikes this year at only 8% and put the odds of a September hike at
only 20%. Their most likely outcome is the first hike coming in December (with
44% odds) followed by no hike at all in 2015 (at 36% odds).
Much depends on the strength of the August jobs report on
Sept. 4 — the last before Yellen & Co.'s fateful decision. Stay tuned. Best
wishes, Jon Markman
The investment strategy and opinions expressed in this
article are those of the author's and do not necessarily reflect those of any
other editor at Weiss Research or the company as a whole.
Source: Money and Markets
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