Morning Comment: Powell Confirms an "Insurance" Rate-Cut

I'm surprised we didn't rally more yesterday

I must admit, I was surprised that the stock market did not rally more than it did yesterday. Chairman Powell certainly did not do anything to change expectations about a July rate cut…nor did he do anything to blunt the expectations that they’ll cut rates three times this year. (In fact, some pundits even said that a 50 basis point cut in July was back on the table.)….I would have thought that a rally of 25-30 points (or more) in the S&P 500 would have been in the cards after that kind of performance out of Mr. Powell…not just a 13 point gain.

Having said this, the rally was still enough to take the Nasdaq Composite to new highs…and the S&P and DJIA within a whisker of their own record highs. So it was still a very good day for stocks. I did not think Mr. Powell would be quite so dovish…because the Fed has not eased over the past 10yrs unless the stock market was flat on its back. Therefore, it has become evident that the Fed is going to engage in an “insurance” rate-cut and is no longer as “market dependent” as they have been over the past decade.

Powell's testimony has led me to be less cautious

This does not ensure that the stock market is going to rally in a significant way going forward, but it certainly raises the odds that it will. Therefore, after hearing what Chairman Powell had to say yesterday, I have become less cautious about the stock market than we had been in recent weeks.

However, the key leadership groups need to play catch-up soon

HOWEVER, I am not ready to send a green flag up the flag pole yet. First of all, after a 9% rally in less than six weeks (+11% for the Nasdaq), the market has become overbought on both a short and intermediate-term basis. Second, three different critically important leadership groups/indexes continue to lag the major averages. I totally disagree with those who say that the underperformance of the semiconductor stocks, the Transports and the small-caps (the Russell 2000) does not matter. (It’s rarely “different this time”.) Therefore, I will be watching these groups/indexes very closely over the coming days & weeks. If they can rally further…and play catch-up…it’s going to be quite positive. If, however, they roll-over in any meaningful way…it’s going to be very bearish.

The fundamentals are still a head wind for stocks

I also worry that the slowing global & domestic economies (that the indexes mentioned above are signaling/confirming) will create headwinds for the markets…even though the Fed is about to start an easing cycle. Remember, “rate cuts” are not “QE programs”…and thus do not have the kind of immediate and direct impact on the markets/economy…..Also, the Q2 earnings season is about to begin. If the guidance that is provided during this upcoming reporting season takes the full-year consensus estimates down…it will take those already anemic expectations (of just +2.7%) down towards zero. That would create another headwind for stocks.

3030 is the key confirm a true breakout has taken place

Therefore, as I watch the above-mentioned leadership groups/indexes…I will also be watching the 3030 level on the S&P 500 Index. As I mentioned recently, that level would constitute a 3% move above its old highs…and would signal that the S&P had finally made a “meaningful” break above its old record. The S&P has broken 1%-2% above its old highs on three different occasions over the past 18 months…only to roll-back over in a significant way. So I believe it will take a 3% rise above the old highs would finally signal a break-out in our minds...and thus the 3030 level is much more important than the 3000 level that everybody is talking about right now………….A move above 3030, would lead me to raise the green flag.

Posted to The Maley Report on Jul 11, 2019 — 9:07 AM
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