The Federal reserve confirmed what I have suspected since it changed its tone in December last year and performed its 180 degree U turn in policy.
That is that their long term plan to normalise interest rates since the great recession in 2008 has failed and failed completely, they have declared that there will be no rate hikes in 2019.
But it is worse than that, because they have also announced that the reduction in the FED's balance sheet (quantitative tightening) will halt completely by September this year.
I am now convinced that the rate hiking cycle is over and the FED will actually start lowering rates from here on out as the global economy continues to slow down.
The capitulation of the FED is more than just an admission of failure it is an admission of DEBT MONETIZATION!
Ten years have gone by and in their attempt to prepare interest rates for the inevitable economic contraction to come, they have only managed to get to 2.25% before squeezing the economy too hard and crashing the market, as the sell off in December last year was testament to.
The plan as always was to raise rates high enough so they can then cut those rates and achieve some measure of stimulus during the next recession.
Except during this hiking cycle the FED wasn’t hiking into strength in an attempt to stave of inflation but purely to provide a tool to combat the next recession.
So the FED were hiking into weakness and that is why they only made it to 2.25% before they pricked the very bubble that they blew up with 7 years of 0% interest and $4.5 Trillion expansion of the money supply.
Well cutting 2.25% isn’t going to stimulate much is it?
So when Ben Bernanke promised that the expansion of the balance sheet was a temporary measure to save the global economy he was lying. It was a permanent expansion of the money supply, it was turning debt into money, debt monetization, Creating liquidity out of thin fucking air.
The FED cannot raise rates anymore.
In my opinion we can expect more QE (money printing) and I would expect negative rates also.
The inversion of the yield curve and plummet in yields in the bond market after the FED's announcement is confirmation that the market is already in the process of pricing in future rate cuts not hikes.
What does this mean for the stock market?
Well it was very interesting to note that by the close of the same day of the FED’s announcement that the S&P and DOW both closed near the lows of the day. If they could have rallied more on this news then that was the best opportunity to do so and they didn’t.
However both gold and the bond market rallied strongly as the Dollar index fell sharply.
The next day (Thursday) we saw what looks like a blow off top, a big green candle and then on the Friday a bearish engulfing candle swallowing up all the previous days gains and closing roughly at the lows. This created a bearish shooting star candle on the weekly time frame.
It is my opinion that the market rally since December was a pricing in of the shift in FED policy and now having brought the rumour for many weeks it is now time to sell the fact.
I believe the Bull market died on the 3rd of October 2018 and we have been in a Bear market since that day. This rally, although very impressive has no fundamentals behind it and so is an excellent example of a head fake bear market rally.
On the weekly chart above, take note of the divergence in the weekly RSI as the market made a new high in October and then rallied from December each successive peak has been lower forming a downward trend in the RSI this looks like the peak of this current cycle to me.
So where to from here?
Here is a possible technical scenario going forward.
An impulsive wave seems to have completed with the sell off Last Friday (22nd March) and a corrective move is to be expected.
The $2800 level has acted as resistance multiple times and failed the first time it was tested for support.
That is a little strange as there was no better time to expect a flood of new buyers pouring into the market than breaking such a significant level. This should have been an excellent driver for the bulls.
Instead Price could not be sustained above this level and what should have proven to be strong new support at $2800 (having proven such stubborn resistance previously) folded like wet cardboard. Bulls would appreciate that having broken through this major resistance every attempt would have to be made to defend this level and yet the price was rejected violently.
Please bear in mind this is only a rough idea and one of a multitude of possibilities but I am confident the end result will be the same, a re-test of the lows.
Getting back to fundamentals for the moment, the only real bullish argument for the market other than the FED's U turn is the “good news” about US trade talks with China. This rumour has been getting shoved down everyone's throats constantly for months now and has not produced a goddamn thing. I think now a measure of exhaustion is setting in as we can only buy the same bullshit for so long.
This good trade news situation feels to have been going on forever and quite frankly the market can only keep pricing in this rumour for so long before selling is the only option left.
It is earnings and the expectation for growth of those earnings which drives the market higher in a bullish cycle. Well now that this expansion is likely over so to will the expansion of earnings also be over.
So the market has been rallying on diddly squat. As I mentioned a couple of weeks ago this rally has been driven by stock buybacks as investors both retail and institutional have been net sellers of equities and that is still true.
With the exception of a spike in early March, fund flows have continued to be negative since the December lows and as the latest bar shows they still are.
Well from next month this primary driver for the market comes to a halt as we enter a buyback blackout for most of April and May.
How will the market perform without its primary source of buyers?
With as many as 90% of companies not participating in buybacks next month we can expect buying strength to fade considerably.
Forgive my cynicism but I believe that the buybacks were a desperate attempt to drag retail investors back to the market via FOMO (fear of missing out) but this attempt appears to have failed as the fund flows show investors are not being suckered back in this time.
I think we are going to make our way back down to the December lows in time. It will unlikely be a straight trip there as multiple manipulations and attempts will be made to keep this dying market afloat but I think they will fail and the market will seek new lows likely much deeper ones.
I could of course be wrong and is impossible to see the future but barring central bank interference by providing liquidity directly I can't see any reason why this market won't go down.
Take care all.
All views expressed in this article are the opinion of the Author and not to be considered financial advice.