My article last week, “Tale of the S&P 500 Tailwind,” came on the heels of the Emini S&P 500 (ES)’s rally of 100.75 points (4.1%) off the 2019 low and 53.25 points (+2.1%) above the Christmas week close. On its face, the advance was impressive, but recall that I qualified my enthusiasm, stating the following:
“In the aftermath of the Christmas Upside Reversal, last week ES (e-Mini March S&P) traversed a range from 2438.50 to 2539.25… and ALL OF IT occurred on Friday (1/04/19) after Jay Powell acquiesced to the wounded easy money masses, appearing to become a kinder, gentler, and more investor-sensitive Fed Chairman.”
Furthermore, I added:
“With the next FOMC policy meeting, statement, and press conference scheduled for January 29th and 30th, we are unlikely to hear from Fed Chair Jay Powell again for at least three weeks, but we will definitely hear from President Trump…”
Who knew that Fed Chairman Powell would feel the “need” to double-down on his original market supportive comments made on January 4 during a televised conversation with former Fed Chairs Bernanke and Yellen? As it turns out, Powell had scheduled for Thursday January 10 — less than one week after his metamorphosis into a kinder, gentler Fed Chair — another little (televised) chat at the Economics Club of Washington, D.C., perhaps to reiterate the Fed’s newfound sensitivity to both real economic data and stock market behavior, rather than “blindly” marching towards rate normalization after a 10-year period of Fed-engineered, artificial ZIRP or NIRP.
Let’s notice on the daily ES chart that the price structure has climbed for 6 consecutive sessions, starting with Powell’s Jan 4 comments through his Jan 10 Q&A session, into this past Friday’s (Jan 11) close. Reaction to his original comments on Jan 4 pivoted ES to the upside in excess of 100 points on that trading day, whereas anticipation of what he might say on Jan 10 helped buoy the equity markets and produced the bullish tailwinds we discussed in last week’s column, which noted:
“Right now, my technical set-up and momentum work on ES point still-higher, into the 2580-2600 target zone where I will be expecting the recovery rally off of the Dec. 25th low at 2316.75 to exhibit both pattern completion and upside momentum exhaustion.”
ES hit its post Dec 25 recovery rally high at 2599.50 last Thursday (Jan 10) afternoon during Powell’s televised Q&A. It closed Friday at 2595.00, bumping against the upper bound of my next optimal target zone of 2580-2600.
The question now is whether ES (and the other major equity market indices and ETFs) are at or near exhaustion? My answer: It depends if the direction of the dominant trend is Up or Down.
If the dominant trend is down from the September 2018 all-time high at 2947.00, then the recovery rally (so far) of 44.9% of the entire decline into the Christmas Day low at 2316.75 certainly qualifies as a “healthy and normal” counter-trend period amid sentiment gauges such as DSI (Daily Sentiment Index) that have climbed from an extreme oversold reading of 6 on Dec 24 to 48 as of Thursday’s close, and the CNN-Money Magazine Fear and Greed Index, which has improved from 0 (that is correct, ZERO) on Dec 25 to 30 as of Friday’s close.
If ES suddenly reversed to the downside after a 45% recovery rally overlaid by a climb in many of the sentiment gauges towards neutral, traders and investors hardly should be surprised. After all, a price reversal from in and around the 50% recovery-resistance zone (2635) of the entire prior downleg would be considered classic technical action within a larger bearish set up.
That said, however, let’s also notice on the daily ES chart my annotations of the most significant and egregious Fed “interventions” during the “V-shaped” 11-session recovery period. On the left or downside portion of the “V,” the jawboning efforts from the powers that be elicited failed rally attempts followed by continued weakness, whereas, so far on the right or ascendant portion of the “V,” Fed Chair Powell’s remarks on Jan 4 and Jan 10 have triggered and buoyed upside progress.
What is curious, though, is the conspicuous lack of volume expansion after Powell’s initial Jan 4 acquiescence to the whining, super easy money crowd. Volume certainly expanded into the series of down-days during late December, but has failed to produce a mirror image in the relentless rally period during the first two weeks of January.
If we are to consider Christmas week weakness as a high-volume downside capitulation, then how should we consider the ensuing early January period in the absence of compelling volume? Last week, in particular, during the heretofore anticipated bullish tailwinds, neither Powell nor the algo traders were able to manufacture a powerful, confirming high-volume upside follow-through. If the old adage “volume precedes price” has any merit, then an extension of the 11-session rally engenders much skepticism.
This should be a bit disconcerting to the bulls, especially as earnings season revs up this week with the big banks starting to report on Monday (Jan 14). As the ES price structure navigates the 50% retracement-resistance zone of the entire September-December decline, overlaid by possibly diminishing returns from “the Powell Effect,” amid declining volume, and a near-term Rising Wedge formation, the current technical set-up is particularly vulnerable to a powerful downside reversal. Earnings — or investor reaction to earnings — need to overcome a relatively mature recovery upleg.
And if earnings reactions increasingly become a sell-the-news event, then the interventionist Fed will have to attempt to rescue the equity market yet again. In that the net result of Powell’s second bout of Fed cheerleading (aka manipulation) last Thursday amounted to a “surge of ES strength” of only 15 points from 2585 at 12:45 PM ET to 2599.50 into Thursday’s close, I dare say that the efficacy of Fed jawboning about “patience” before hiking rates again might have run its course. If earnings fail to lift the equity indices, Powell or his FOMC faithful might have to schedule another Q&A session, or a speech to float the next trial balloon, a temporary halt to the Fed’s autopilot QT (Quantitative Tightening) program.
While some will argue that Fed back-pedaling on the next rate hike, real data dependence, and a more market-friendly demeanor in and of itself is sufficient to underpin considerably more upside in the major averages, and to extend the 2009 bull market, I have my doubts that the Powell Era will facilitate a return to the “experimental” QE Bernanke years.
As a matter of fact, in a late-Friday article published in the online WSJ entitled, “In 2013, Powell Worried Fed’s bond Buys Were Distorting Markets, Transcripts Show,” the Journal writes: “Jerome Powell worried the Federal Reserve’s bond purchases were distorting markets and encouraged his central-bank colleagues in early 2013 to signal plans to wrap up the stimulus campaign, according to transcripts of policy meetings released Friday.” Furthermore, Powell is quoted in the January 2013 transcript saying the following: “There is every reason to expect a sharp and painful correction.”
Thus far, in the larger scheme of things, the 2274 point bull market in the cash SPX from 2009 into 2018 has relinquished 594 points, or 26% between September 21 and December 26, 2018. Is a three month, 26% decline, the full extent of “a sharp and painful correction” after a 10-year bull market?
Although he made those comments 6 years ago, when he was a “lowly” Fed Governor instead of the Fed’s head honcho, do we think Powell has evolved into a different mindset, or alternatively, down deep, that he is more convinced now, 6 years hence, that “normalization” must proceed, albeit with a pause here or there, to ensure the future health and prosperity of the economy and the financial markets?
Who knows? The markets do. They will provide hints about whether The Powell Fed is a wolf in sheep’s clothing, or really a sheep. The price action over the coming days will tell us a lot about the market, and its underlying psychology.
For our analysis and trading purposes at Mptrader.com during the upcoming week, we will be closely watching the juxtaposition of the ES price structure and the sharply up-sloping, but highly sensitive 5 DMA, at 2578.90 as of Friday’s close (see chart). As long as ES continues to trade above the 5 DMA, ES should trade higher and continue to claw its way towards a test of the 50% retracement-resistance level at 2635/40 from Friday’s close at 2595.00. Conversely, if ES breaks, sustains, and closes beneath the 5 DMA, then extreme caution will be in order ahead of an increasingly likely exhaustive end to the recovery rally, and resumption of the dominant downtrend.