Professor’s Comments December 20, 2018

Posted by OMS  at December 20th, 2018

The markets rose early, then pulled back hard after the Fed announcement giving up all the early gains and then some.  Before the Fed announcement, the Dow was up 381 points as sub-wave 2 up made for a nice Fed day trade.  It could have been the shortest Santa Rally in history. Then once the Fed announced it was raising interest rates by 25 basis points, the markets started to fall rapidly as sub-wave 3 of Wave 3 down started to take effect. 

In yesterday’s Comments I mentioned that the Dow could trade slightly over 24,000 before sub-wave 2 up completes. The Dow reached a high of 24,057 before dropping to 23,323 at the close. The NASDAQ and SPX were down 147 and 39 points, respectively. Volume on the NYSE was heavy, coming in at 118 percent of its 10-day moving average.  There were 4 new highs and 857 new lows.

While yesterday’s rate increase was expected (it had been announced for months), traders were still hoping they wouldn’t get one.  With a slowing economy and pressure by the President for leaving rates unchanged, most traders thought Fed Chair Jay Powell might change his mind.  He didn’t.  And once he started talking about two more rate increases in 2019, the market started to decline in earnest. BTW, if you get a chance, you might want to listen to Chairman Powell’s comments.  He certainly doesn’t inspire confidence.  Sounds more like a college professor.  Hmmm?

Yesterday was the seventh time in the past two years that the Fed has raised short-term interest rates.  It was the fourth rate increase in 2018. This rise in rates is occurring at the same time the Fed is selling $50 Billion a month in bonds and mortgage backed securities, which takes money out of the economy and further tightens the money supply.  In my opinion, the policy is crazy and will likely drive the country into a recession. 

The Fed policy has caused the U.S. equity markets to lose over $5 trillion in less than 3 months.  After the announcement, Chairman Powell said, “I think that the runoff of the balance sheet has been ‘smooth’ and has served its purpose. I don’t see us changing that.”  Smooth?  Are you kidding me?   Apparently, Mr. Powell is not bothered by the fact that his policies have caused $5 trillion to evaporate from the markets.  Is he that naïve or just plain stupid?  And he’s says he’s not going to change the policy???  No wonder the market tanked after his comments. 

Anyhow, Wave 3 down is back underway.  Because yesterday’s decline was impulsive, it confirmed the wave count.  BTW, if you’re counting waves, yesterday’s decline from 24,057 was likely the start of sub-wave 3 down of Wave 3 down of Major Wave 3 down.  So, the odds of additional decline are overwhelming. I’m going to stay with my target for the Wave 3 down as the 23,000 level, possibly as low as 22,800.  After that, the Dow should start a Wave 4 rally. Then once Wave 4 up completes, I still believe the 21,300 level will be tested before all five waves of Major Wave 3 down are complete.  The decline I see coming won’t be straight down, as there should be corrective rallies along the way.  But for now, the path down to 23,000 or lower is a lot easier than any potential rally.  It’s probably going to take traders several days (weeks) before they get over the unsettling comments made by the Fed Chairman.

BTW, I can’t defend what Chairman Powell is doing now by raising rates and selling securities. But I can understand his predicament. He’s probably thinks that by raising interest rates now, he will be able to lower rates to stimulate the economy in the future. Right now, with interest rates being relatively low and a Fed balance sheet loaded with junk, he’s pretty much out of bullets. However, with a slowing economy, the thing we don’t need is a Fed raising interest rates. In my opinion, this is similar to bleeding the patient to make him well. It’s a crazy. We need a new Doctor!

The Sector Ratio stayed at 0-24 negative.  There were NO sectors on the Strong List.  I can’t even think about getting long equities until I start to see a few sectors on the Strong List. 

Gold and silver rose yesterday, but mining stocks fell along with the market.  My VTI-volume indicator for the miners generated a new Sell Signal.  Gold (the metal) remains on a Buy Signal.  Students should always remember that gold and silver (the metals) are typically considered as safe havens in a time of crisis.  When you own something like GLD, you own an ETF that tracks the price of gold bullion.  Mining stocks are not gold. They are just companies that mine the metals.  Mining companies own very little gold as they sell it as soon as they remove it from the ground.  So, you only own a mining operation where the price is impacted by many other factors, including the health of the overall economy.  Owning the actual metal is a lot safer.

BTW, I did notice that UUP, the ETF for the Dollar has moved back on the Dean’s List.  This is not a welcome sign if you’re long gold.  But after the Fed raised short-term rates yesterday, it made the Dollar stronger.  A strong dollar will put short-term pressure on gold.  

Crude oil rose slightly yesterday from extremely oversold conditions.  My timing indicator for crude remains on a Sell Signal.

My market timing signal for Bonds (a Buy Signal) was golden yesterday.  TMF rose 0.71 cents to 19.36 as scared money moved out of equities and poured into Bonds. I would expect this to continue as the equity markets continue to decline.

That’s what I’m doing,

h

Market Signals for

12-20-2018

One hour video recorded from May 28, 2016 The Professor’s Signs of a Major Market Turn – Prospectives and the Projected Timing and Levels One hour streaming video – includes webinar handouts The Professor usually holds an update class whenever the Market looks like it may be making a major turn. If you have been following the Professor’s Comments you know that a turn is due….. LEARN MORE

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.