Weekly Comment - November 18, 2019

Nov 18, 2019 | Nick Foglietta


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“Preemptive” monetary action

Two Technical Updates

This week’s comment will update two areas that I continue to watch closely.

Interest Rates:

Since September, interest rate markets are being impacted via Federal Reserve market activities to “steepen” the yield curve. The chart below shows the abrupt change in direction at that time.

The trend higher for 10 year bond yields in the US since the re-initiation of QE and overnight repo operations has been a choppy. It will be interesting to see if there is more upside in US interest rates or if they just trend sideways for the foreseeable future.

Canada’s 10 year interest rates still have the same chart shape as the US but with lower levels.

The uptick in interest rates since early September has a historical precedent.

During the onset of four of the last six recessions, the yield curve has gone from “inverted” back to “normal shaped” exactly at the same time the recession has begun (we only see this in hindsight as the economic numbers come in).

I believe the central banks are well aware of where the global economic cycle resides and why, for the first time in Fed history, Jay Powell and the US Federal Reserve board are taking “preemptive” monetary action rather than waiting for the data to justify doing it.

The hope is to head off a recession BEFORE it sets in…the risk is they are using their monetary fire power too early, and they won’t have enough left to fight a real recession if/when one comes.

In a world chocked full of debt and leverage, it is understandable why the Fed has made this choice to be preemptive.

As investors, we need to be “eyes wide open” as to what the Fed is doing and the significant risks it brings into play both on the upside and downside for asset prices.

Stock Markets:

Stock markets are the largest benefactor of the US Federal Reserve’s preemptive activity.

Let’s revisit a chart posted a few weeks ago when all of the money printing activity got started.

The chart above is from the October 21st weekly comment, and was created on the 17th of October.

The theme of the chart was looking at the “Box 5” target of 3130 on the S&P500 index as a long term BULLISH breakout.

As of the close on Friday, November 15, 2019, the S&P500 was almost at 3130 and had exceeded the “Box 5” trend line. (Below)

 

Note: the trend line was hit earlier than the 3130 level because the S&P500 is going straight vertical rather than sticking within the context of the trend line.

For all intents and purposes, the breakout for the US stock market is complete and there is no technical upside target in sight.

In other words, US stocks are free to run as far as they can to the upside on the wave of Federal Reserve QE liquidity.

Once the 3130 level is exceeded by 2%, it will become our new stop loss for tactical portfolios.

In summary, the US Fed has successfully created new all-time high prices for US large cap stocks, but the success has come at great expense.

Long gone are the days where the Fed talked about interest rate increases being on “auto pilot” and 2019 will see three or four interest increases of 0.25%.

In reality, 2019 has seen three interest rate cuts and the reinstitution of QE. That is a huge miss in terms of Fed forecast…and these are the same people telling us they know what is coming next now…Hmmm?

Friends, whether you realize it or not, you are living though monetary history. Nothing like the present money printing scheme has ever been thought about, let alone attempted, in history.

Let’s see what happens next.

 A Couple Charts…

The Fed making stocks go up by cheapening “effective” interest rates.

 

If you had any doubt about the Federal Reserve being the reason the stock market keeps powering higher…check out earnings growth for the S&P500.

To finish, check out these statistics from the US auto financing market.

Just a reminder that seats for our Coffee Break sessions are filling up fast, please pop on over to our events page to RSVP. Looking forward to seeing you there.

And with that…have a great week.