September 15, 2015

September 15, 2015 Damned If You Do, Damned If You Don't There are times when the Fed is truly stuck between a rock and a hard place. This is one of those times. The odds of a rate increase are 50/50, meaning that no one really knows what the Fed will do. For the doves, since the Fed has had many opportunities to telegraph a rate increase and has instead left it ambiguous, they believe the Fed will not move. China's devaluation move set off a firestorm of currency eases across the globe, and that has put pressure on the Fed to not take actions that would lead to a stronger US Dollar. However, the Fed hates it when foreign central banks tell us what to do, and often do the opposite just show their independence. The Employment component supports a rate increase. The inflation component, ex-food and energy, could be seen as going either way. A move here would be anticipatory. Holding off puts the Fed in the uncomfortable position of making that call perhaps in December, and the Fed doesn't like messing with year-end, pre-Christmas rate increases. It messes up the books for many. The best Fed call... "One And Done". It probably won't happen, but that would be the best for the market. If the Fed hikes 25 basis points "preventative" and is willing to say that this should be sufficient to take us to the end of Q1 2016, we'd target Dow 17,200, S & P 2040, and NASDAQ 5000. The real question is, what is bad news for the market down here? If the Fed does not move and says that they remain "data dependent", then we are in for more uncertainty in November/December. It's bullish for now, but pushes out the rate-panic action, which many would rather not have to deal with later this year. A rate hike and remaining "data dependent" means that we could see another hike in early Q1 2016, if warranted. That, too, is not what the market wants. However, there are those that would feel the Fed is more proactive and that the market can count on the Fed, so a small negative, but only another test of recent lows. Energy, Materials, and Utilities are acting a little better today, but they are just ugly charts, deeply oversold. There are no bases of consequence to support much more than a technical bounce. On the flip side, the other sectors, including Financials and Industrials are looking like they could emerge from this "wedge" formation we've constructed over the past 3 weeks. Technology, Consumer Staples, Consumer Discretionary, and Healthcare also have "wedge" formations with a slight upside bent. Technically, a "wedge" does not indicate direction, just that the break out of the apex should initiate a short-term trend. Therefore, Thursday's action is important, technically and fundamentally. There has been so much pessimism built into this market, if I had to make a call, it would be to the upside. What I see is a stable Euro/Dollar and fairly stable 10-year rates that have limited upside, even if the Fed hikes 25 basis points. As I've said in the past, China is a manipulated economy, market, and currency. Once through the Fed's looking glass, we are entering earnings season. That stable Euro throughout the volatility seen in Asian currencies could be a plus for earnings. While the market indicators are deeply oversold, they have crossed over and are improving. A push in the right direction and the bulls could gain the upper hand. Technology has been the strongest group, providing real leadership. Look for that to continue. Should we be so lucky as to see a "one and done" statement, look for Financials and Industrials to really run. If the Fed doesn't act, Consumer Staples and Healthcare will benefit. I am giving the lean toward the bulls for Thursday. Compq
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