Will The Federal Reserve’s Rate Hike Prove One Too Many?

The Fed’s 9th Rate Hike is Virtually Certain This Week

Last week’s economic news was very good.  For the month of November, the Consumer Price Index (CPI) was ZERO, reducing the annual rate to a very tame 2.2%.   In addition, retail sales were better than expected, following a great October. (https://www.census.gov/retail/index.html).

The CPI  increased at an annualized rate of 2.9% as recently as July.  At its new and lower rate of 2.2%, inflation is finally BELOW short term interest rates.  This is the first time in years.   Any speculation that the Fed may leave rates alone in December has been quieted.

The pending rate hike in Federal Funds is now, again, a virtual certainty and priced-in to short term yields.

Three month T Bills closed at 2.37%, a rate consistent with a 9th rate hike.

It is expected that the Fed will raise the Federal Funds target to 2.25-2.5%, thus, 3 month Bills already trade close to the anticipated midpoint.

The consensus now is the December hike will be the last, until economic data indicate a need for change.

Despite the good news, however, stocks continued to drop at frightening speeds.

Stock Indexes Enter Bear Market Territory

Pictured below in the Slide Show are 5 key indexes. Three have broken support to enter Bear Markets. The Standard & Poor’s 400 Midcap (MID), the Russell 2000 (RUT) and the New York Composite Index (NYA) are now BEARISH.  The Dow Jones Industrial Average (DOW) and Nasdaq 100 (NDX) are within striking distance.

It’s likely that the Dow and NDX will follow the small and mid cap stocks into BEAR MARKET territory.  Rallies, so far have closely followed the BEAR MARKET RALLY script.   “Characteristics of Bear Market Rallies “.  (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).

Daily volatility continues to increase.  So far in December, the Dow’s daily average deviation has been a mind boggling 1.37% or 340 points.  By comparison, in August and September, the Dow’s mean deviation was 0.4% or roughly 100 points.

Bear markets thrive on illiquidity which increases volatility.  As a result, equity indexes are susceptible to extreme moves on the downside. A breach of key support may trigger a “Waterfall Decline”. “Stock Markets Poised For Waterfall Decline”. (https://markonomics101.com/2018/12/09/stock-markets-poised-for-waterfall-decline/).

Financials Continue To Plunge

Most forecasts are for GDP to rise 3% or so this year and 2.5% in 2019.  That belief is at diametrical odds with the behavior in many, many stocks.  Possibly most alarming are Commercial/Investment Banks, presented below in the Chart Slider.   Bank of America has joined Citigroup and Goldman Sachs in a sudden free fall.

Even JPMorgan and Wells Fargo, both AA rated banks, have broken Head and Shoulders Topping Patterns.  Something is VERY WRONG in this sector.  These markets either anticipate MUCH lower earnings or an increase in defaults and bankruptcies or both.

Despite a Bright Outlook, Retailers are Under Pressure

Positive retail sales data did nothing for their stock prices.  The entire sector is acting similarly to financials in virtual free fall.  Costco (COST) announced higher earnings after the close on Thursday, December 13 yet fell nearly 10%.   The market reacted as if the news was a “disappointment”.

Any drop of that size on “good news” is typical BEAR MARKET behavior!

Retail is down across the board.  COST is the nation’s third largest retailer in terms of market capitalization. On the other side of the spectrum, JCP is not a favorite to survive.  Retailers, like giants Sears and Toys ‘R Us, have gone bankrupt in droves.(https://www.businessinsider.com/retail-bankruptcies-list-this-year-2018-4).

Walmart is the largest retailer by sales and is also just breaking down from a giant topping pattern.  It was featured in our “Chart Of the Day: Is Walmart Signaling Retail Slump?”  (https://markonomics101.com/2018/12/13/chart-of-the-day-3-is-walmart-signaling-retail-slump/).

What Are Plunging Banks And Retailers Telling Us?

The markets are painting a very concerning picture.  The drop in Crude Oil Prices could be rationalized away as a result of the exploding US Oil Shale Industry.  Banks’ declining fortunes can be blamed on hikes in short term rates and the expectation of earnings pressure.

The drop in retailers, though is just plain alarming.  So is the drop in the price of transportation companies such as FedEx and UPS.  Only an economic slowdown or systemic illiquidity are consistent with this fact set.

See our Section called “Are Transportation Companies Telegraphing a Disappointing Christmas?”. (https://markonomics101.com/2018/12/11/will-the-stock-market-get-a-santa-claus-rally-or-seasons-beatings/)

Too Many Bulls Or Too Many Bears?

The latest survey of the American Association of Individual Investors reveals the highest Bearish sentiment in 5 years.  Latest numbers are just 20.9% BULLS and 49.9% BEARS. (https://www.aaii.com/sentimentsurvey).  This is considered a BULLISH contrary indicator.  Once there are too many Bears, there are not enough sellers left.

Is sentiment now so pessimistic that we should look for a market RALLY instead?  The evidence is far from clear cut.

Investor’s Intelligence, which polls advisers, reports the exact OPPOSITE. (https://www.investorsintelligence.com/x/default.html).   Their latest survey counts 45.4% BULLS and only 20.4% BEARS.  These are historically overly optimistic readings and indicate high levels of complacency and among advisers.

(Some additional excellent and current sentiment data by Yardeni Research can be found here. (https://www.yardeni.com/pub/peacockbullbear.pdf).

Sentiment, unfortunately, is often too subjective to be useful for trading or market timing.   Clearly, fear IS high, but there is NO reason why it can’t stay high or even go much higher.   Fear or Panic accompanies all good bottoms, but markets turn at extremes.

The market environment has too much downside and too little upside.

Information is Wealth and Power.   Be INFORMED, Not MISLED!

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