Crazy September

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The stock market sold off heading into the high expectations of a rate hike in September. Then it bounced, but sold off when the FED did NOT hike rates. Yellen came out in a speech, days later and said they will hike rates, in what seemed some strange hope that would lift the markets, but that only added more volatility and now the market is selling off again. The FED is now responding to changing market conditions and second guessing market volatility is dangerous.

Crazy September

It’s like the wheels have come off the Apple Cart;

Pope visiting and addressing Congress for the first time in history, Trump leading in the GOP polls, Speaker Boehner resigning, UN meeting, China President visits, Obama will be meeting with Putin, FED expects to cut rates – doesn’t – but then says it will, Democrat front runner, Hillary, losing ground to an openly declared Socialist, Hillary continues to face the drumming of the email scandal as she preps for the Benghazi hearing, Volkswagen purposely cheating EPA requirements creating massive recalls and investigations, Iranian Deal passing as Iran chants death to Israel, and the month’s not over. It is one crazy September. By the way, rates are still at zero and the Fed is still the largest holder of U.S. treasuries.

Courtesy of FRED

Courtesy of FRED

What about Earnings?

Did I mention it was the start of Earnings Season too? Ironically all the other news has been overshadowing what is really important in the financial markets and that is earnings. Are companies doing better or worse? What are top line revenue/sales? What are forward projections? One really important beat of the economy is the health of U.S. companies measured by their earnings.

Dow Rally and S&P Falls?

On Friday we had a very usual trading day if one were to measure the major indices. The Dow Jones closed higher, but the S&P and broader based Russell indices were off (down) significantly. The Dow Jones is only 30 stocks and thus one stock can drive the index higher or lower. On Friday it was Nike’s earnings and strong projections that sent the Dow Jones higher as all the other stocks in the index were lower. Nike had an unusually strong story, which wasn’t just from a strong dollar. Top line sales and revenue growth was better than expected and the full year guidance was higher. I guess China is buying more Nikes.

Earlier in the month, FedEx earnings came in weaker than expected and lowered their full year earnings down by 20 cents (.20). While the bottom line is a concern, what we did see was top-line revenue increase to $12.3 billion vs. $11.7 billion last year. International package shipping was down 4%, but that seems due strictly to the strong dollar and lower fuel surcharge (from the strong dollar). While the stock is down, I don’t see the news totally bleak. Top line revenue and shipments grew, just not as strongly as expected. FedEx said they expect the U.S. economy to grow 2.5% in 2015 and 2.8% in 2016 – of course this contradicts government GDP. The stock has short-term support in $140 area.

Strong Dollar and Weak Exports

While Nike earnings came in strong, Nike seems to be the exception. We have seen earning misses and far lower forward guidance. A general concern heading into the 4th quarter is the Fed’s rate hike expectations that could curtail spending and growth. No one wants to curb spending and thus sales heading into the holiday season. What is driving this perception is the Fed’s rate hike and also global economic slowdown concerns.

Of course a stronger dollar is hurting U.S. exports as foreign buyers look elsewhere. Yet we could see a strong dollar into the holiday season to drive domestic sales higher before we see the dollar come under pressure. Any rate hikes would send the dollar higher, deflation stronger, and exports lower – all which would slow down domestic economic growth. Notice exports declining ever since they ended QE and then raised the specter of rate hikes. This is one chart that is alarming the Fed.

Courtesy of FRED

Support & Resistance

INDU 16,000
The Dow Jones has sold off into the FOMC meeting and the whole rate hike volatility. Money flow is in shock, should it flow into equities, bonds, or cash? It is waiting for direction from the Fed, but none has come. I would look at 16,000 as short-term support and if we move lower we need to see strength in the support area. Thank Nike for keeping this index from selling off on Friday.

NDX 4200
The tech heaving index could see more volatility coming from earnings season and of course Apple has been a mix bag and is an overweight. Apple looks like it wants to move back up to 120 and that could help boost this tech heavy index.

SPX 1920
Unlike the Dow Jones that was saved by Nike, the S&P 500 came under late session pressure. I would look at 1920 as a support we need to see support. If we can’t close above 1920 then we could be in for a lower move to 1900 or even 1880 before support steps in.

RUT 1120
As I frequently mention it is the broad based Russell that gives us the best idea of order flow and thus broad market trends. Unfortunately the Russell looked very weak on Friday and closed near a critical support area. If this index can hold above 1120 we could see a visit to 1100. At 1100 it will be a real test as to whether this index will rally into the year-end or if it will crack and we see a bear market into the end of the year.

Yellen’s Mistake

Yellen made a HUGE mistake on Thursday by openly stating their will be a RATE HIKE by year end. She back tracked a little including the “data dependent”. The problem is how you can tell people there WILL BE a rate hike, if ANY rate hike is also DATA DEPENDENT. Is she not contradicting her own methodology?

The problem was Yellen saw the market continue to sell off AFTER the Fed did NOT raise rates, she panicked and in knee jerk fashion said they will raise rates – right after they didn’t.

All she added was more confusion and again set expectations just like she did in September. What happens when she doesn’t raise rates? How will the market believe her, you are only afforded so many excuses. What if she raises rates a paltry 10 bps points as a sign they did something? She then needs to carefully set the tone that the Fed is “one and done”, because if the perception becomes this is the START of a series of rate hikes we will see the market sell off, the bond market sell off, and the dollar rally and deflation pressure increase. All of which she can’t afford to let happen.

Again – this all comes down to message crafting and as long as the Fed sets the tone that low rates are “temporary” and we will get back to “normal” soon – the market will forever expect rate hikes.

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