BarroMetrics Views: All Hands on Deck
In “New Era? 2“, I articulated my doubts on the resilience of the US Stock Market. But, given the directional move since Trump, I said I was unwilling to short this market.
A new clue has come in that deserves consideration: The St Louis Fed Reserve’s Asset Monetary Base.
Figure 1 shows the chart. You will notice we are seeing a possible break in the “topping pattern”. If the chart breaks down, it means that we’ll be seeing money flood into Main Street. In the past, within two to three months of surplus funds hitting the US economy, we have seen inflation rise (and thus interest rates) rise.
The problem for the FED is that, given the excesses of QE, it will find it hard to put a cap on inflation. At the moment it is looking for 2%; but if we see a surge above that number, the spectre of an unwanted inflation level will raise its head.
This is why it’s important to assess the stage of the business cycle the US: if it is at an early phase, interest rises will be a catalyst for further rises (on the basis, growth is back!); on the other hand, if in the latter stages, interest rate rises will awaken the bear (on the basis, OMG interest rising!). And, if we are seeing the latter case, it will be a case of “all hands on deck” to manage the bear.
The good thing is we have time. The sell signal is triggered on seeing two consecutive closes down to confirm the break. Then, there is usually a two to three month buffer from the break to a stock market reaction. So, there is no need urgency to act – we can assume the bull will continue unless the sell signal is triggered.
The next AMB is due Dec 30.
FIGURE 1 AMB
BarroMetrics Views: A New Era 2?
Xmas came early courtesy of the FED.
As expected, it raised rates 0.25 bp. What was unexpected was the comment that, in 2017, the FED would probably raise rates three times. Even more unexpected, the markets’ (USD and US stocks) was relatively muted until the news conference. At that point, the USD accelerated to the upside and stocks moved South.
The muted response gave a trader time to go long the USD against a host of currencies. For me, the EUR and JPY are especially vulnerable.
Given that response, I am unsure that we are on the cusp of a new era. For that to be, we should be seeing price action akin to the early bull stages for the US economy i.e.:
- Interest rates up.
- Stocks up and USD up.
The response we saw last night
- rates up,
- USD up, and
- stocks down
usually signifies the end of a bull market in stocks. But, that is not how I’d interpret the stock market’s price action since Trump’s election. In yesterday’s blog, I opted for the latter option because I had not seen enough bullish action in stocks to jump on the bull bandwagon. On the other hand, given the solid up move, I was not prepared to go short. Hence my comment in an earlier blog – “I’d be either long or out when trading US stocks”.
What then to do, given the dichotomy?
For the moment, I’ll focus on buying the USD and stand aside from stocks.
BarroMetrics Views: A New Era?
Finally getting to my feet. The hip replacement has gone exceptionally well. The only issue now is to repair the mistake the HK specialist made when implementing the new lens in my left eye. That’s set down for Jan 5. I’m hoping all will go well.
Turning to the markets….
By far the most important event will be the FOMC decision at 14:00 EST today.
In my view, the FED will raise rates. The rate decision won’t be the only thing I’ll be focusing on. The others?
- Whether the FED is likely to raise rates more than twice in 2017? The post FOMC news conference will provide a guide.
- Trump’s tweet (if any) on the FED decision.
If the FED hints at no more than two rises, I’d see the stock market rallying and the USD not continuing its upmove (especially against the JPY and EUR) in the short term.
A suggestion of more than two rises will have the opposite effect: USD up and stock down.
Let’s see what happens.
I like to thank many of our readers for their concern and well wishes for Ray as he is recovering from his hip surgery.
He will need at least another week of rest before he can sit in front of his computer. Thanks again for showing you care.
A while back, Ray had embarked on writing an ebook on goal achievement and organisation, entitled “Live the Life of Your Dreams”.
He had completed his first version but not happy with its form and wanted to rewrite it. He just had a cataract op and will be going for his hip operation on 2-Dec. Given his surgery and time needed for recovery, his ebook can only be available sometime next year. I’m unable to provide a precise date for now.
Thanks for your well wishes, patience and support.
BarroMetrics Views: Adjusted Monetary Base
Figure 1 shows the most recent Adjusted Monetary Base. The flat movement after forming the low at 3,600B suggests that the FED is easing but not in any great way. So, it’s difficult to assess from the AMB the next direction the interest rates will take.
Probably the Non-Farm on Friday, Dec 2 will be a better guide. (See Interest Rate Rise Dec 2017?)
FIGURE 1 AMB
BarroMetrics Views: S&P – Up or Down?
A weekly bullish conviction close above the Maximum Extension (2186) will signal the start of new bull market. The problem is I am not seeing the range and volume I’d normally associate with the start of the a new bull.
Under the circumstances, I’ll resort to the 2007 view: ‘Long or out’. In other words, I am not prepared to short the indices until I see some sign that the sellers are back.
BarroMetrics Views: Interest Rate Rise Dec 2017?
I had rated a rate rise by the FOMC in December as close to a certainty as you can have in the uncertain game of trading. But the recent massive move up in interest rates has changed my mind. (for an example of the move, click the link below to a chart for the 30-year US Bond cash rates).
The movement in the cash rates may have done the job for the FED. On the other hand, having signalled strongly for a Dec rise, if it doesn’t raise rates, its credibility will come into question.
So, what to do?
The answer is the Non-Farm Payrolls scheduled for release on Dec 2.
Normally, I guess at the figure by looking at what the FED may want the figure to be. This approach has served me to good stead. This time, I am reversing the approach:
- If the number comes in near the bottom end (or worse) of the consensus range, I’ll take it that the FED won’t raise rates at the FOMC on Dec 14.
- If the number comes in near the top end (or better) of the consensus range, I’ll take it that the FED will raise rates at its FOMC in Dec.
Why will a lower than expected jobs report provide the FED with wiggle room? Well, remember its ‘get out clause’: a rise is data dependent. So, if the jobs data is poor, the FED need not raise rates.
If I can blog next week, I’ll post around Nov 30 on how I expect the markets to respond to the FED decision.
Note that I won’t be posting most of next week with a cataract op on Nov 28 and a hip replacement on Dec 2.
BarroMetrics Views: Perception of Reality – The Key
Before the blog, a comment on my schedule. I thought I’d have more free time this week. Nope! For example, tomorrow I have medical appointments lined up back to back from 8:00 am to 2:30 pm AEST
So, my blog posting will probably be inconsistent until I have recovered from the hip replacement.
Continuing from the last blog…..
One of the differences between successful traders and unsuccessful is the fact that successful traders align their perception with reality. You will recall that my view of the way we humans interact with reality is “out there as seen by the in here”.
There are three ways humans use their perception:
- Contextual: the Freud approach…we have unconscious responses built upon previous experiences, especially those from our childhood.
- Reframe: the NLP approach…..we reframe past experiences, so they provide empowering rather than limiting stimuli.
- Acknowledge and Accept: the ACT approach….through attention and awareness we accept our feelings so as to prevent the 3Fs (flight, fight and fear) from overwhelming our cognitive faculties. By developing value-driven goals, we engage in value driven effective action – effective because the actions lead to goal attainment.
In a recent session of Ultimate III, I saw just how important is ‘attention & awareness’.
We were running through the process which FX pair we’d trade last week. During the review, the reasons why the USD should prove strong, the AUD, NZD, EUR and JPY weak. The rest I’d rate as neutral.
One student traded the AUDCAD because I recommended it – notwithstanding that I specifically said I’d leave the CAD alone because it was neutral.
It’s important to understand that the student believed that I had recommended the CAD as a possible pair. Luckily I video all sessions, so I was able to check.
Now that was a minor issue. More important is the way this approach when trading – we’d continually reinterpret events to suit our analysis. Then we’d wonder why we can’t make money.
Success is dependent in aligning our perception with reality. The tools we use are attention and awareness to our emotions and behaviour.
I’m in Sydney for a cataract operation and to organise a date for my hip replacement.
I had forgotten how much time it takes to get to an appointment and to return. And since I arrived, all I seem to be doing is going from one doctor to another.
My last appointment is on Friday, November 18. So next week, I’ll again be posting regularly.
Apologies for the break in posting.