Strange markets indeed!
I clearly understood why there was a big selloff on Friday morning thanks to the poor jobs number and downward revisions to previous months (referring to the monthly BLS Jobs Report). What doesn’t seem to make sense is why the market rallied back so fast, if we are to believe what almost every pundit and market commentator told us, (since the Fed decided to hold rates at the zero-bound at their mid-September meeting), and that is that the markets were disappointed that the Fed failed to raise rates.
On Friday, we witnessed a capitulation. The Dow went from over 200 points down to finish higher by 200 points. What would change sentiment so quickly when the Jobs Report was so awful?
It was like that Jobs Report never existed Friday morning except to cause some traders a quick loss on their trades. Lol!
What is clear to the profitskey.com is that this is more entertaining than a 3-ring circus! The news media must look like fools for telling us that global depression is at hand as of 8:30 on Friday morning, but only 6 hours later, everything was “hunky-dory!”
This rally looks to me to be a true rencontre chien et chat RELIEF rally! Notice that I bold-print and put in caps the word “relief.” This rally on Friday afternoon was a relief rally because there are many equity traders who are happy to keep 0% interest rates for a lot longer. Yep, that’s right! And if I am right, then this blows holes in the theory that the markets were wanting a rate hike!
Even before the Fed’s September 17th decision not to raise rates, I had noticed that the equity markets were still doing what they had done the past several years. That is, the equity markets fell when the US dollar rose and/or interest rates on the 2 year and 10 year US Treasury notes were rising. This was indicative of a market that continued to equate the Fed rate hike threat as bad news. So, I was firmly in the camp that still believed that a Fed rate hike would be bad news for the stock markets.
But in the days following the Fed no-rate-hike decision, the equity markets were plunging and under great volatility. Sure enough, the most popular market pundits were going on the financial news channels like CNBC, Bloomberg and others touting that the markets were in a tailspin because the Fed failed to raise interest rates. Some of these “experts” literally begged the Fed to re-consider and act quickly to raise rates at the October meeting. I must admit, I was questioning my own belief system–had I misinterpreted the markets actions in the days leading up to the Fed no decision?
I was of the belief that the markets would not take kindly to any rate increase at this time with China in a near recession and emerging markets and commodity producers falling into depressions. Perhaps I had been wrong?
Then, the amazing capitulation in the US equity markets occurred on Friday. The markets rallied 400 points from trough to peak. Suddenly, some people began to say the unthinkable: the markets seem to like that the Fed will likely not raise rates any time soon. My belief system was redeemed! My read of the market tea leaves was correct…and it was all of these pundits who might have been wrong….again!
After all, I have been saying for the past few years on this blog that I don’t believe the Fed will raise rates at all before 2016…you can go back and read my past blogs to find the reasons. All of these highly popular pundits have been getting it wrong the past few years, and I have been right on the money up to now. And keep in mind, I am not even sure the Fed will raise rates in 2016, but I leave that as an open issue to be debated for now.
So, why did the markets collapse after the Fed no decision? I think the pundits misinterpreted the causes of the market selloff. What the markets were reacting to was that China was spinning into a possible recession, and the world’s second largest economy has a great influence on markets these days. That cannot be ignored any more. The fact that the Fed did not raise rates was official recognition of how important China is to world markets. The reaction was related directly to what was going on overseas and not to the Fed’s decision to leave rates alone.
On Monday and Tuesday, we will have to watch for follow-through by the Bulls to see if this reversal is real. Once again, this reminds me of an adage I sometimes state on the Ace “Talking Stocks Forum”: “You can choose to believe what the market pundits say, or you can choose to follow a fact-based (technical analysis) strategy like we do at www.AceStockTrader.com . ”
In a free market, it’s your choice.