Today is the big Fed meeting, and as I have been saying, I expect that the Fed will indicate in “Fed-speak” that the reduction of its asset purchases will begin at the November meeting. To this point, the market has been calm about the tapering, but I don’t see how that will last for long.
Based on the market valuations, it doesn’t look possible that tighter financial conditions have been priced in yet. Not with an S&P 500 trading at 20.5 times its next-twelve-months' earnings estimates.
I know people will argue that low rates drive higher multiples; that is simply not true. If it were the case, Germany and Japan would trade at higher valuations than the US, and they do not. They trade at discounts, despite having comparable growth rates. Anyway, we can talk about this another time.
Ultimately, what drives PEs are growth rates, and growth rates are falling here and all over the world. Peak growth has passed and the Fed simply waited too long to begin this process. Now they will begin to reduce purchases into weakening global growth. The market will not like this, and it will likely reject this change in policy the best way it knows how—by ramping up volatility.
It isn’t so easy for the Fed to simply not taper at all, the bond market would not be happy about it nor would the dollar. The dollar would tank, and inflation worries would ramp up. From a political standpoint, the US needs low rates to finance its budget, and if the Fed doesn’t appease the bond market this time, the Treasury will be having to issue debt at much higher rates. Powell is simply boxed in.
This is nearly the exact scenario that was witnessed during the “rates are far from neutral” or the “auto-pilot” moments of 2018. We will get a good sense of this tomorrow, how the market reacts to the Fed.
S&P 500
The S&P 500 started out strong but could not hold those gains, finishing down nearly 10 bps. From intraday peak to trough the decline was almost 1%, and if you were a bull after seeing Monday's rally off the lows and the gap higher Tuesday morning, the finish was quite the let down.
The S&P 500 futures seemed to have the best technicals at this point for me to work with and it seemed that the top we witnessed to start the month was likely the end of a Wave 5, and we are now in a corrective wave.
I haven’t really had the time yet to count this pattern out completely. But I am of the belief it may only be the start of the first leg lower. The trend lines seemed to be fairly strong and well-defined. The next level of support on the trend lines comes around 4,240, which does correspond with a level of support from mid-July.
Housing Sector
The housing sector continued to look terrible, with the index nearly touching the lows of July. The RSI said the index wasn’t oversold yet, and that further declines were still to come. The 200-day moving average was in jeopardy.
Dow Jones Transports
The Dow Jones Transportation took out the 200 day-moving-average Monday and fell again Tuesday. Not a good look there.
FedEx
It will not get any help today from FedEx (NYSE:FDX) either. The company missed analysts’ earnings estimates Tuesday and warned about higher labor costs. The stock was down over 4% after-hours and had a big level of support at $235. That will need to hold. After that, we could be targeting a gap fill at $183.
UPS
United Parcel Service Inc (NYSE:UPS) was all falling last tonight by around 2%. The gap fill was at $178.
Uber
Uber Technologies (NYSE:UBER) ripped higher yesterday by more than 10% after it said it was on track to be EBITDA positive. The stock jumped right to resistance at $45 and a hit wall. Now we know why there was so much call activity in the name in recent weeks.
