foxex: The Virtue of Patience

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Stocks Rally on Fed's 'Patience'

Markets Close

Dow
25,954.44 +0.24%

S&P
2,784.70 +0.18%

Nasdaq
7,489.07 +0.03%

VIX
14.02 -5.78%

INV Anxiety Index
103.59 High

US 10-Yr Yield
2.654 +0.26%

Stocks Climb on Trade Deadline Delay

"...All we need is just a little patience
Said sugar make it slow and we'll come together fine
All we need is just a little patience (Patience)

Mm, yeah..." -- Axl Rose, Guns & Roses, 1988

I never thought I'd quote Axl Rose from Guns & Roses in this note, but it makes sense today. Hear me out. The members of the FOMC paraphrased Fed Chair Jerome Powell in the release of the Fed minutes from its January 30th meeting, earlier today. The Fed minutes are essentially a recap of the FOMC's decision on interest rates, and if you remember, the Fed decided to hold rates at 2.25-2.5% and be 'patient', before deciding to raise them again. Here is the exact language from the FOMC:

"...In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."

It sounds a little sweeter coming from Guns & Roses, but these have been magical words for the stock market. The S&P 500 is up 4% since January 30th, and more than 11% since the beginning of the year, when the Fed started using the "p" word.

Why it Matters

Of all the things that have impacted the stock market in the past year, the Fed's stance on interest rates has weighed the heaviest. The trade war has had an impact, but most investors see it for what it is, a political game of leverage between two super-powers who need each other more than they care to admit. While the trade wars have more of a psychological impact on the broader market, interest rates have an extremely practical impact on all markets. When interest rates go up, borrowing costs go up, and then companies large and small are more hesitant to take on loans to grow their businesses, hire more employees, build those new factories, acquire a competitor, etc. It impacts growth and earnings, which impacts stocks.

Speaking of stocks, check out what's going on with the Nasdaq and a key resistance level in James' Chart of the Day, below.

Higher interest rates also make bonds and savings instruments more attractive as yields rise. That $88 billion that left the stock market at the end of 2018 went to cash, money markets and bonds. With the Fed in patience mode, it may come back faster than we thought.

There are red flags, to be sure. Read this if you need a dose of cortisol:

4 Red Flags that Could Cause a Stock Market Pullback

A Little Perspective

Anyone who has born before 1980 has some perspective on interest rates. In the U.S., they are still historically low. Remember - during and after the financial crisis of 2008-09, the Federal Reserve lowered interest rates to zero, basically, in an attempt to jumpstart the economy, spur on lending and get the country and its financial system out of the crisis.

It worked.

The Fed has been steadily raising rates over the past couple of years in what it calls, 'normalization'. Rates at 2.25-2.50% are anything but normal, but you need to take a history lesson to really understand what 'normal' means. For that, we turn to Louise Yamada, the legendary market technician, who has chartered U.S. interest rates back 200 years.

Now that is perspective.

Programming note: I'll be out for the next couple of days, but you will be in the capable hands of James Chen, CMT, and Jake Frankenfield, our fearless editor.

Chart of the Day: Nasdaq Composite Catches Up to its 200-Day Moving Average

If there's one technical analysis indicator that's held in the highest regard by technical analysts, institutional traders, retail investors and the financial media alike, it's the 200-day moving average. But the reason for this is not abundantly clear. If it was based on the number of trading days per year, that might make some sense. But there are around 252 trading days in every year, give or take.

What it most likely comes down to, then, is simple tradition and inertia. The 200-day moving average has been a fixture on financial price charts for a very long time. In a way, it's become somewhat of a self-fulfilling prophecy. So many investors and institutions and media outlets are focused on the 200-day that mass market behavior has tended to revolve around this specific indicator. Whatever the case may be, ask any market analyst or trader, and you're bound to be told with strong conviction that the 200-day moving average has huge price significance.

There are several ways in which this indicator is typically used by market participants:

1) The slope (up or down) of the moving average can be used to inform the underlying trend.

2) The position of price in relation to the 200-day (above or below) can inform whether there is a bullish or bearish bias.

3) The position of another key moving average (e.g., the 50-day) in relation the the 200-day (above or below) can also give clues as to the directional bias.

4) The 200-day often works exceptionally well as a long-term, dynamic support/resistance level in trending markets.

This brings us to the Nasdaq Composite market index. Of the three most popular large-cap indexes - the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite - only the traditionally tech-heavy Nasdaq has just reached up to its 200-day moving average. The other two have already risen to leave their 200-day averages well behind. That being said, the Nasdaq Composite has surged by a greater percentage (around 20%) from its late-December lows than both the Dow and S&P 500.

From a technical perspective, what does this tell us about the Nasdaq Composite and the markets, in general? Clearing the 200-day moving average to the upside is like overcoming a major psychological barrier. At this point, a Nasdaq breakout above this key indicator is little more than a technicality, given that the Dow and S&P 500 have already done so. But having all three key indexes well above their respective 200-day averages will provide investors a certain degree of confidence that stocks are indeed back in bull market territory.