A Market Timing Report based on the 1-30-2015 Close, published Sunday February 1st, 2015
The SP500 Index fell on Friday after comments by the Fed’s Bullard, currently a non-voting Fed governor, to Bloomberg, that the Fed would raise interest rates by June or July due to strengthening of the U.S. economy. The Fed does not really believe that the U.S. economy is going to continue to slow even though Friday’s first Q4 GDP reading was only +2.6% vs. the expected per Bloomberg News of +2.2-3.5% with a consensus of +3.2% (year over year seasonally adjusted rate of GDP growth). The market is afraid that the Fed will raise rates too aggressively and shut off the stock market rally and slow the economy as well.
I asked Brian Sullivan through Twitter to ask Bill Gross (the “Bond King”), whom he was interviewing just after the Fed FOMC decision on rates, whether he thought there was an economic need to raise rates beyond the symbolic one mentioned initially by Gross. He mentions me by name (at about 5:15 into the segment; and yes, I did a double take at that moment) as he asks Bill Gross my question here:
My question was rhetorical of course, as Bill acknowledged in his answer. As I discuss below, cheap money can begin to damage the economy at a certain point.
SP500 Index (SPX, SPY; click the chart to enlarge it):
As for U.S. small caps, they are weakening (check the futures here at CNBC.com; although I prefer the mobile app). The futures can change hourly, so check for the latest data. A breach of the prior recent lows will set up a head and shoulders break and a target near the October low, which is a significant discount to today’s pricing. For the Bulls to win on this pullback, it looks as though the 200 day moving average or thereabouts will have to hold as a low. The December low offers the last ditch support as it does for the SP500 Index as well.
Russell 2000 U.S. Small Cap Chart (RUT, IWM; click the chart to enlarge it):
Gold has resumed its rally thanks to the increasing likelihood of negative real interest rates (earning less than inflation on government debt) for the foreseeable future. Why is this? Because central banks around the world are buying back their own debt to artificially keep rates low while inflation continues to fall. Gold investors are betting that inflation picks up again despite worldwide disinflation and outright deflation in some countries. It’s the central banks against the slowing world economy that already has too much product on its hands, driving down prices. Even if you can’t predict what the inflation rate will be in one year (hint: no one can), you can still participate in the gold rally, while it’s occurring.
What is the danger of the money printing? When the money printed does not go into a productive and innovative economy, it is a waste. What is produced may be simply more of the same thing being produced elsewhere adding to supply and driving down prices. So the net effect of cheap money through low interest rates in non-productive/non-innovative economies should be even MORE DEFLATION, not the inflation they are expecting to create. (Why do they want inflation? Because they are in debt and debtors always want inflation to be high to drive down the cost of their debt in current dollars. It makes it easier for them to pay off their debt.)
The Gold ETF Chart (GLD; click to enlarge the chart):
The 10 Year Treasury interest rate (TNX, tracked by TLT if Bullish; TBT if Bearish): Treasuries continued to rally predicting further deflation despite comments by the Fed to the contrary. Having exposure to TLT or bonds including municipals has payed off well as a hedge against stocks for just over a year. The Russell 2000 small caps are now back below where they were at the close on 1-15-2014.
Please Click the TNX Chart to enlarge it (NOTE: This is a weekly chart):
CONCLUSIONS: Breaking the Dec. lows would be very negative for both large and small cap U.S. stocks. Gold is rallying and is back on as a trade for now. We hold a long term gold position as well, just as we hold U.S. dollars. Treasuries are signalling more trouble ahead in the way of deflation and worldwide slowing. Cheap money can be the CAUSE of trouble for the world’s economy as discussed. Central banks are trying to abolish the economic cycle and history says that is a losing proposition.
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