foxex: Powell and Trump Throw a One-Two Punch

Focus on the Price

Thursday, December 20, 2018

1. Powell and Trump disappoint the bulls

2. S&P 500 comes out of freefall

3. VIX breaks to new highs

Major Moves

Wall Street is still reeling from the one-two punch it received from Fed Chair Jerome Powell yesterday and President Trump today, but it is showing signs it may be able to bounce off the ropes instead of going down for the count.

Yesterday, I discussed the disappointment traders felt when the Federal Open Market Committee (FOMC) sent mixed messages by raising rates while noting the economy was softening a bit. The FOMC also downgraded its inflation expectations for 2019 from 2% to 1.9%.

While a decrease of a measly 0.1% may not seem like a big change, it sent a huge message. Traders were willing to accept interest rate hikes if the economy was growing and inflation was seen to be an issue that needed to be dealt with to prevent it from getting out of control. But if those two things are no longer true, traders are left wondering if the FOMC is going to kill any future economic growth by raising rates too high, too fast.

Not to be outdone by the FOMC, President Trump – who told Chair Powell he did not want him to raise rates – has caused more uncertainty on Wall Street by telling House Republicans that he will not sign the short-term spending bill passed by the Senate.

President Trump is demanding $5 billion for the border wall, and it doesn't appear he has the votes in either the House or the Senate to get what he wants.

There is still time to see Congress pass something before funding runs out at the end of day on Friday. They've pushed spending bills to the brink before. But when you throw this on top of the bearish mood that is gaining sway on the markets, it could lead to more selling.

S&P 500

The S&P 500 continued its bearish retreat today, falling as low as 2,441.18, but seems to have come out of its freefall by rebounding and closing at 2,467.42.

To put this in perspective, the index hasn't been this low since traders starting flooding into stocks in the growing hope that Congress might actually be able to pass the "Tax Cuts and Jobs Act." This means the market has officially erased all of the Trump tax plan gains.

From a technical perspective, you have to go all the way back to the resistance level the S&P 500 hit in mid-June 2017 to find a price level that is interacting with today's price movement on the index.

While it may be tempting to think support is going hold at ~2,450, the index has broken through far too many long-term support levels during the past two weeks to warrant that much confidence. Yes, this level held today, but it must not only continue to hold but also serve as a spring board sending the index higher before traders will start to trust it.

Plus, based on the 300-point range the S&P 500 had been consolidating within for most of 2018, and a bearish break point of ~2,630, the S&P 500 could be headed toward the support level it originally established in March and April 2017 at ~2,330 (2,630 – 300 = 2,330) if investor sentiment can't recover.

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Risk Indicators

I mentioned yesterday that the VIX didn't respond the way I would have expected it to given the drop in stock prices and the continued decline in high yield bonds. Instead of rising as the S&P 500 was falling, it diverged and remained relatively unchanged on the day.

That divergence ended abruptly today as the VIX rose to, and closed at, its highest level since February 9.

The resistance level just above 25 that has kept a lid on the VIX since early-October finally failed, and the VIX climbed above 30 momentarily in late-day action before pulling back and closing at 28.12.

The VIX still hasn't climbed anywhere near as high as it did when the market first pulled back in February. That pullback generated a spike in the VIX that took the indicator up as high as 50.3. But breaking above 30 does bring the VIX back up into the range the indicator was in for most of the first week following the February correction.

This tells me any imbalance the market was experiencing between the magnitude of the pullback on the S&P 500 and the increase in the level of the VIX is moderating.

Some might go as far as to say it's time to lean on the old contrarian statement, "If the VIX is high, it's time to buy." I think that is a bit premature. I think the most we can get out of the VIX jumping up to this higher level is the mildly contrarian belief that support at ~2,450 on the S&P 500 has an increased chance of holding for now.

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Bottom line: Wall Street's lump of coal

Based on the price action in the stock market since October, traders seem to have lost their faith in the power of a Santa Claus rally.

With only a day and a half of trading until Christmas – the market closes early on Christmas Eve – chances are good Wall Street is going to wake up with a lump of coal in its stocking, not a diamond.

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