Professor’s Comments September 19, 2019
Posted by OMS at September 19th, 2019
The markets fell sharply after the Fed announced they were reducing their target for the Federal Funds overnight interest rate by a quarter of a percent. Then once Fed Chairman Powell finished his comments, the market rallied retracing all of the day’s decline. The Dow finished with a gain of 36 points at 27,147. The NASDAQ and SPX finished down 9 and 1 point, respectively. Volume on the NYSE was light, coming in at 86 percent of its 10-day moving average. There were 79 new highs and 10 new lows.
Yesterday’s early decline and late rally was likely associated with the completion of minor wave 2 up within Wave 3 down. If this is the case, the next decline should begin soon, possibly within the next day or so. This decline, wave 3 of Wave 3 down, should take the Dow down below the 3 September low near 26,000. The wave 2 scenario remains my primary scenario as long as the Dow stays below 27,307.
The alternative is that yesterday’s early decline was wave 4 down of Wave ‘C’ up, with yesterday’s late rally being part or all of wave 5 up. If this is the case, the Dow could rally to a new high, above the 27,399 level.
The market remains in very fragile condition.
After yesterday’s session, the NASDAQ moved to a Neutral signal. The Dow, SPX, and Russell 2K remain on Buy Signals.
The Dean’s List remains Positive, while The Tide remains Neutral.
While everyone was focusing on the Fed announcement, the more interesting development was what was going on with the Fed’s ‘repo’ rate. It moved to almost 10 percent overnight before the Fed injected another $75 Billion into the overnight lending markets. This was in addition to the $53.2 Billion it injected the previous night. The reason I mention this extremely unusual event is because it has not happened since 2008, when liquidity for Wall Street brokers and banks all but dried up. Repos occur when brokers and banks need cash for operations, so they lend Treasuries to the Fed overnight, typically at rates near or below the Fed Funds rate. Then once they open for business the following day, they pay the interest on the overnight loans and get their Bonds back. But since last Monday, the overnight money has been drying up, driving overnight rates to almost 10 percent! That’s over four times the Fed’s target rate. To get interest rates back down, the Fed had to rush money into the system. I don’t believe this is cause for immediate action, but the fact that it happened at all is cause for concern. I still believe that debt, especially corporate debt, and liquidity are at dangerous levels in the U.S. and throughout the world. Yesterday’s Fed injection was just another example of just how fragile the financial system really is.
BTW, IF liquidity remains a problem in the weeks ahead, it’s almost certain that that the Fed will begin another round of Bond buying. Remember, it was just a few months ago that the Fed was selling Bonds, trying to reduce its balance sheet. But after reducing its assets from $4.5 Trillion to $3.8 Trillion, it may have gone to far in terms of tightening the money supply and reducing liquidity. I would view any hint or suggestion of a Fed Bond buying program as a sign of trouble for the equity markets as it would be an extreme measure.
The Sector Ratio remained at 22-2 Positive after Wednesday’s session. The Strong Sector List was led by Semiconductors, Service, Insurance, Consumer Products, and FoodDrugs. The two Weak Sectors were Real Estate and Leisure.
Gold (GLD) fell 0.89 cents on Wednesday. I’m still avoiding gold for now as the metal remains on a Sell Signal. Once gold completes its Wave 4 pullback, gold should rally to the 1,600 to 1,650 level as Wave 5 of Major Wave 3 up unfolds. The Model continues to wait for a signal change before buying gold again. I still believe GLD will trade down to near the 137 level before Wave 4 completes.
Bonds moved to a Neutral Signal after yesterday’s session. TMF gained 0.36 cent to 28.67. The pattern suggests that TMF is completing wave 4 down of a five wave sequence for Wave 1 up. If Bonds move to a Buy Signal, my target for Wave 1 up will be near or above the 35 level.
There were no changes to the Model after Wednesday’s session. The Model remains 100 percent invested in cash ($125,927).
The Model Portfolio is being shown for educational purposed only. The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio. Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.
That’s what I’m doing,
h
Market Signals for
09-19-2019
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 05 Sep 2019 |
NASDAQ | NEU | 18 Sep 2019 |
GOLD | NEG | 18 Sep 2019 |
U.S. DOLLAR | POS | 29 Aug 2019 |
BONDS | NEU | 18 Sep 2019 |
CRUDE OIL | POS | 16 Sep 2019 |
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