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Will the FOMC Put Coal In Our Stockings? Critical Day For the Market

Posted by Pete Stolcers on November 8

Published 9:30 AM ET – In my market comments I’ve been telling you that there are three things that need to happen for the market to have a sustained rally. First of all, Republicans needed to maintain control of Congress. Secondly, the FOMC needs to soften its tone. Lastly, we need trade deals with Europe and China. This week we will have greater clarity and we will be able to predict market direction.

Republicans did not maintain control of Congress. They lost the House and I view this as neutral to slightly bearish. Many analysts have been saying that gridlock is good for the market – I disagree. Trump has cut taxes, reduced business regulations and is attempting to improve trade agreements. Democrats will stall his agenda through constant investigations and possibly through impeachment hearings. The House controls the purse and we could see a budget related government shutdown. Trump was going to ease banking regulations and that is unlikely to happen with Maxine Waters running the Financial Services Committee. She has already said, “I will do to banks what they have done to us”. The financial sector is critical to a market rally.

The second condition is the easiest of the three. Today the FOMC will release its statement and it needs to be dovish. Domestic economic conditions are robust, but global activity is declining. Typically, market corrections get the Fed’s attention and they soften their tone. Hourly wages only increased .2% in the last jobs report so the Fed has breathing room. CPI and PPI have also been benign. Four rate hikes are projected in the next year and we need to hear that one of them might not be needed. If the December rate hike is postponed, the market will stage a nice year-end rally. If the Fed is steadfast, investors can expect a lump of coal in their stockings this Christmas.

The final condition is a trade deal with China or Europe. Trump and Xi have been exchanging punches and both were reluctant to commit to a G20 get together on November 29th. This tells me that there is “bad blood”. Trump feels that China has been ripping us off for decades and he’s infuriated that China tried to gain leverage through agricultural tariffs to hurt his constituents ahead of the elections. Xi has instructed the media not to report on slowing economic conditions. The PBOC has been adding liquidity and that is a sign that they are preparing for a long battle. At best we will get lips service after the G20 meeting. Nothing will get done for many months. Europe is fragmented and after three years they can’t agree on Brexit. Italy is pushing the envelope by running huge deficits and the EU has not figured out how they will deal with it. The EU will not forge a trade agreement until Trump sets a deadline.

To recap, the elections will have a slightly bearish impact and we won’t see any trade deals this year. Our last hope is a dovish FOMC statement today.

In addition to the above-mentioned issues, credit concerns are popping up in emerging markets and Q4 comps will be much harder for companies to beat since the tax cuts went into effect a year ago.

More than 75% of the S&P 500 has reported and 78% of the companies have exceeded earnings estimates. Profits have grown by a whopping 25%. Valuations are reasonable at a forward P/E of 15 and this is keeping a bid to the market.

Yesterday we saw a huge relief rally. Trading programs giveth and trading programs taketh away. Once the momentum was established the market continued its March higher. We are above the 200-day moving average and the 100-day moving average is in reach. If the Fed is dovish the market will rally through this resistance level and it could challenge the all-time high. If the Fed is steadfast, the market will struggle to get through SPY $282.

The heavy selling we saw in October has my attention. Sellers were relentless and they were taking advantage of seasonal strength/earnings season. I don’t like shorting into year-end, but I see more negatives than positives. If the Fed maintains its course I will be looking for shorting opportunities. If the Fed holds off on a rate hike in December I will passively join the rally and I will make sure not to overstay my welcome.

Swing traders need to remain in cash. Today’s news is even more critical than the elections in the short term. If we miss some upside, we will look for opportunities to get long and we will use protective stops. The downside risk is greater than the upside reward at this juncture.

Day traders should be ready for choppy conditions. The market will settle down ahead of the Fed. Wait for 15 minutes after the Fed statement and follow the momentum. Support is at SPY $276 and resistance is at $282. I believe the Fed will soften its tone.

This is the final piece of the puzzle and we will have clarity after today. From this point on I will know which side of the market I want to be on.
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