Professor’s Comments – Fed Day 12/15/2021

Posted by OMS  at December 15th, 2021

Today is an important day for the markets.  The Fed will be releasing its latest policy on interest rates at 2 pm this afternoon.  Because of the increase in inflation that we’ve seen recently, it is widely expected that the Fed will announce a major change to its current ‘tapering’ policy. 

Yesterday, the Labor Department reported that the Producer Price Index, which is the way the government measures wholesale prices, rose 9.6 percent in November.  This is the largest increase in prices since the government has been tracking Producer Prices.  The thing about this huge number is that it’s probably understated, as it is NOT in the government’s interest to show the real number because it increases the cost of entitlement programs, like social security.  

Between the Fed’s zero interest rate policy and the Congress authorizing money we don’t have; the American economy has been flooded with money created out of thin air.  Now, these policies and the free money are coming back to haunt us.  Millions of retirees, who have been living on a fixed income, and receiving almost zero on their savings are suffering.  And with inflation increasing the price of food, gasoline, and about everything else, they are about to get squeezed.

The fact is the Fed screwed up royally!  They probably should have terminated their $80 billion a month bond- mortgage buying program months ago.  Their reluctance to do so, mostly because they didn’t want to upset the equity markets, is now causing hyperinflation.  Americans, especially seniors, are about to pay a huge price for their ineptitude.

Now besides getting little for their savings, the money seniors have in the stock market, where they are practically forced into getting 2-3 percent dividends, is about to get attacked.  If the Fed announces a quickening to the end of ‘tapering’ or even mentions a date when it will start dumping stocks on its bloated balance sheet, it could cause shock waves on Wall Street.

Remember, from a wave count perspective, I’m watching for Wave 3 down to start.  This wave could easily take 3-4 thousand points off the Dow before it’s through.  

One of the things to watch today is the Russell 2K.  Specifically, IWM, the ETF for the Russell.  I’ve talked a lot about this ETF in the past few weeks, mostly because small-cap stocks will be the hardest hit if interest rates start to move up.  From a technical perspective, IWM is currently sitting on a MAJOR support line near the 212 level.  This support line forms the neckline of a distorted Head & Shoulders Pattern.  The ‘Head’ is near the 242 level.  In other words, there are about 30 points between the top of the ‘Head’ and the neckline. So, if this neckline support is broken in the days ahead, it’s likely that IWM will trade down to the 182 level.  Remember, my first target for IWM is near the 180 level, which is where the 200 day moving average is located.  After that, the next level of support is near 150, which if broken should lead to a test of the March 2020 low of 95.  Remember, IWM is now in a downtrend as it is currently trading below its 200-day moving average.  It is not unusual for a stock that breaks below its 200-day ma to test its weekly moving average.  That’s another reason I’m using 180 as my interim target.

It’s also why I’m using TZA as the centerpiece of my 4-hour, 30-day chart trading strategy with the ‘Arrows’.  BTW, TZA was up another 0.78 points yesterday, putting the gain for the 20-day old trade at 54 percent.  So far, this trade has only been on when the Arrows on TZA were Green and off when the Arrows were Red.  In the future, I might want to take advantage of the red arrows, but right now, I believe the risk is too large to be on the long side of the Russell.

What?  You still don’t have the ‘Arrows’?  Get them!

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

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