The Fed Is The Real Danger To The Market

Written by Dennis Slothower
Posted February 10, 2018

Unable to build enthusiasm to recover much beyond the 50-day moving averages, selling programs again hit the market on Thursday with great force, led lower by the bloated technology sector and bank stocks, as Fed presidents continue to speak of more interest rate hikes to come.

As of midafternoon Friday when we "went to press," the markets were essetially flat but very volatile.

All in all, small caps have retraced price back to September 2017, while the S&P 500 has retraced price back to October 2017 and the Dow to November 2017.

The problem the stock market has is that it is caught between two key technical levels, with the 50-day moving averages acting now as a resistance ceiling while the 200-day moving average represents support, though this long-term support is quite a spread from the 50-day.

This has traders selling to the next level of support (200-day moving averages), making for extreme volatility as traders seek some kind of long-term support.

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This is what happens when so many people buy at the top of the market and where bullishness had become so lopsided going into February. Remember, going into February, it wasn’t fear but rather the absence of fear that was what you should have feared! As it turns out, it became a major trap.

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Clearly, the 200-day moving averages must hold or we have serious crash-like conditions rather than just a correction. This market must hold major long-term support to avoid a bear market crash.

Melt-ups are followed by meltdowns. Economist John Hussman noted recently, “In speculative markets, the early wipeouts are canaries in a coalmine.”

This reminds me of the dot-com bubble and how it began in the first quarter of 2000. In The Wall Street Journal in July of 2000, after the dot-com bubble had burst, they wrote the following (source):

“Why didn’t they see it coming? After all, the dot-commers embraced risk. They prided in themselves on their willingness to gamble and used it to justify their lucrative stock-option plans. Unfortunately, at the extreme far end of the risk curve, people lose perspective. The difference between a risky but worthwhile business and an idea with no future becomes imperceptible. A combination of arrogance, ambition and lack of experience is lethal.”

Investors have become overly arrogant — where many who are ambitious and lack experience have been jumping into the market recently and are suddenly waking up to risk.

Fed Says Correctiom is "Small Potatoes"

On Thursday, New York Fed President William Dudley said the drop in the stock market to date will not endanger the economic expansion. The decline in stocks since last week “is small potatoes,” Dudley said on Bloomberg television. The New York Fed president said that THREE more quarter-point rate hikes in 2018 remains a reasonable forecast.

In essence, the Fed is still on track to raise interest rates in March in spite of the correction in February.

This same theme was also repeated again on Thursday when Federal Reserve Bank of Dallas President Robert Kaplan said the recent financial correction may be a healthy thing and he didn’t expect this to have a negative impact on the economy. Kaplan sees THREE rate hikes as a base case in 2018.

Both Dudley and Kaplan are right. It is not the correction in the stock market that will have a negative impact on the economy, but three or more rate hikes in 2018 that certainly will. And the stock market is beginning to figure this out, just as we perceived in 2017.

Historically, the month of January is the most common month for a stock market top developing — and it is proving to be true this year.

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This has got to be making the Swiss National Bank very nervous, as it now holds more than 1.4 billion shares of American-listed companies with a total value of more than $92.5 billion.

I look for the market to remain very volatile with a wide February range in price as investors attempt to discover where true support rests.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street Underground Profits. For more about Dennis, check out his editor page.

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