We had the lowest volume of the year yesterday…as just 2.26bn shares exchanged hands in the composite volume…so there’s no question that investors are waiting to hear what the Fed has to say in their announcement and in Chairman Powell’s press conference tomorrow afternoon. That doesn’t mean we won’t get any movement today, but it should still be a quiet day in terms of activity.
The day before a Fed press conference (especially before a two-day meeting) tends to involve what has become known as “Fed creep”…as the stock market tends to creep higher on the day before those meetings. That doesn’t mean that the market always rallies after the meeting, but it usually helps the market move higher before hand. It could/should be an even bigger move this time…because ECB Chairman Mario Draghi made very dovish comments at their annual forum.
More specifically, he said that “additional stimulus will be required” if the economic outlooks does not improve….and that renewed asset purchases are an option…even if that means raising their self-imposed limits on how much they can buy. These comments have the yield on the German 10yr yield falling further into negative territory (-0.31% as we write)…and has caused European stocks to bounce nicely into positive territory. It also has the S&P futures trading 18 points higher in pre-market trading…so it certainly does look like we’re going to get some “Fed creep” today. On top of this, the yield on the U.S. 10yr note has fallen to its lowest level for this move at 2.022%.
If the global central banks act in a coordinated way, these kind of dovish comments bode well for some further dovish/bullish comments from Fed Chairman Powell tomorrow. That, of course, will be music to the ears of the bulls. One thing is for sure, the markets are certainly pricing-in a much more dovish Fed. Given how the futures are trading right now, the S&P 500 index will open less than 1% below its all-time highs…even though the economy is showing signs of weakening and the consensus earnings for the full year are coming down. Similarly, long-term interest rates are coming very, very close to having a “1” handle on them. So there is no question that the markets are pricing-in a very dovish Fed tomorrow. In fact, it could be argued that the markets are starting to price-in an actual rate cut tomorrow (something that some pundits are now saying is a distinct possibility).
What I’m trying to say is that it’s not out of the question that would could be facing a “buy the rumor, sell the news” reaction later this week…and if the Fed does not signal an imminent rate cut (or an actual rate cut), it should lead to a pretty forceful decline in both the equity & fixed income markets.
Having said all this, I still believe the Fed will indicate that they will cut rates IF the data deteriorates further (but they’re really be saying that they won’t cut rates unless or until the data deteriorates AND/OR the markets show more stress). In other words, we still believe the markets will have to show more stress than they did in May before the U.S. Fed actually “acts”……..That COULD happen by the July meeting, so I am NOT saying that the Fed will not cut rates soon. I’m just saying that I believe that the Fed’s future actions will be determined by the economy and the markets…and not the calendar.
So until we get the Fed’s decision/comments tomorrow, there’s not a lot more I can add to my opinion on the broad market. With this in mind, I wanted to take a look as the technical condition of two stocks that have acted VERY, VERY well over the past two and a half years…Visa (V) and Mastercard (MA). The consumer has been quite strong in recent years…and there are indications that they will continue to spend (with the consumer confidence data remaining strong). However, the weekly charts on both V and MA are very extended. The weekly RSI charts have reached over-bought territory…and both names have reached premiums to their 200 week moving averages that we saw last August/September. Visa has reached a 59% premium to its 200 week MA & Mastercard had reached a 85% premium. For Visa, that’s not quite as extreme as we saw last September, but it IS for Mastercard…and they are readings that have usually been followed by compelling short/intermediate-term downward moves in these two stocks. Therefore, they have become vulnerable to serious pull-backs if the broad market declines…and measurable falls even if the broad market holds-up.
We don’t mean to talk too negatively about V and MA. They have WILDLY out-performed the broad stock market since the beginning of 2017 (rallying 120% and 150% respectively…vs. a 30% advance in the S&P since then)…so they still look good on a long-term basis. Also, the consumer remains very confident. However, I just think that these two stocks are getting quite extended on a technical basis…and are becoming ripe for pull-backs in the not-too-distant future.