The market let off a little steam today as Fed Chairman Jerome Powell made it clear this will not be a deep and long interest rate cutting cycle. This is the first cut since 2008 and he’s looking at this as a mid-cycle adjustment.
The Dow Industrials has re-tested the breakout. Moving averages are all below the market to support any dip. The most important factor is that the index broke out to new all-time highs in July and thus far is holding that breakout. If I see the Dow close below 26,700 meaningfully (one to three percent) and hold there then I’ll consider the breakout a whipsaw, but until then, equities are in a bullish mode having consolidated for two years and then breaking out.
The S&P 500 is also in a precarious position. It saw new all-time highs in July, but is up against resistance from the two peaks in 2018. By closing today above 2975, we were able to remain in the current consolidation and no short-term sell signal was triggered. If that level breaks, the 50-day moving average will be tested. The good news is that this average is on the rise and should be a strong support.
If we break out of this one-month consolidation, the upside is HUGE as Trump would say. Two years of consolidation could potentially catapult returns as they did in 2012 and 2016 and we would have what Larry Fink fears, “risk of a melt up, not a meltdown”. My price target, if this pattern resolves to the upside, is 3650. In an interview in April Fink said, “I would clearly tell you at this moment, most investors are exposed by being under invested at this time…despite where the markets are in equities we have not seen money being put to work. We have record amounts of money in cash.”
So the Fed has cut rates and remains able to do more, but cautioned investors against a long rate-cutting cycle. As of today, the Fed Fund Futures data from Bloomberg shows the probability of another rate cut in September has risen from 60.6% to 64.2%. The issue is that global monetary policy is also easing with negative-yielding sovereign bonds in Europe and Japan. The dollar remains the beneficiary of these events. As of today, the dollar broke-out to a new 52-week high with the euro breaking down to a new 52-week low. If the Fed would have dropped rates more, say 50 basis points, this might have been adjusted in favor of the U.S. dollar weakening to help trade, but that’s not what Powell had in mind with his mid-cycle adjustment. Slow and steady is the plan of the Fed and the dollar will likely be the main beneficiary.
There will be a lot of levels to watch in stocks but in the short-term let’s see how the S&P 500 holds above 2950 – where we see the former breakout and where the 50-day moving average is inching toward. If that holds and moving averages continue to move higher, the S&P 500 could have the coiling action of a spring ready to release.