And just like that, the stock market weakness that cast a pall over the start of 2015 has been reversed thanks, once again, to dovish chatter from the Federal Reserve.
This time, it was comments from Chicago Fed president Charles Evans Wednesday night that “raising [interest] rates would be a catastrophe,” given low inflation and mediocre progress in the housing market. With stocks at a major technical support level (the 125-day moving average), it was enough to send equity futures soaring in the overnight session. The positive vibes continued into the cash session after an intra-day plunge in crude oil was reversed.
In the end, the Dow Jones Industrial Average gained 1.8%, the S&P 500 gained 1.8%, the Nasdaq gained 1.8%, and the Russell 2000 gained 1.7%.
Retail stocks were up big as holiday results trickle out. Aeropostale (ARO) gained nearly 24% thanks to an increase in fourth-quarter earnings guidance on solid profitability. The Retail SPDR (XRT) gained 1.4% to push to a new record high.
It’s worth remembering that the market dives in October and again in December were reversed thanks to comments from Fed officials that the era of ultra-easy monetary policy would continue. In October, it was that another round of bond buying stimulus could be started should the economy lose momentum. In December, it was that the Fed would be “patient” in the pace and timing of its rate hikes.
What’s interesting is that following Evans’ comments last night, headlines were filled with chatter suggesting the Fed might still, in fact, be preparing to pull the punch bowl away. The Wall Street Journal’s Jon Hilsenrath — who is frequently used by Fed officials to leak information — argued that a case could be made for the recent strength in long-term Treasury bond motivating the Fed to hike earlier and more aggressively than expected.
Why? To prevent potential asset price bubbles as capital flows into the United States from overseas.
Also, I’d argue that resulting drop in long-term yields — and the associated drop in inflation expectations — could result in some negative psychological feedback loops in the marketplace. If the Fed could force rates higher, it would push cash out of bonds, normalize inflation expectations, and remove this atmosphere of doubt about the health of the economy.
Traders now turn their attention to Friday’s jobs report, with expectations high for another solid print. Analysts are looking for a job gain of around 250,000 and a slight decline in the unemployment rate to 5.7%.
The risk is that this will be interpreted as increasing pressure on the Fed to raise rates ahead of its next policy announcement later this month. If so, the selling pressure that we’ve seen over the last few weeks could rematerialize.
Technically, stocks remain in a neutral position with the NYSE Composite climbing back over its 200-day moving average but still below its 50-day moving average. However, extended investor sentiment, a multi-month rollover in market breadth, and the elevated level of the CBOE Volatility Index (VIX) suggests the selling pressure isn’t over yet — pressure that has kept the NYSE Composite in a sideways range since last summer.
I’m recommending investors use this time to build positions in precious metals as the group looks set for a bounce on the rising risk of global currency and bond market troubles in the months to come. The Market Vectors Junior Gold Miners (GDXJ) is up more than 1% for Edge subscribers since added earlier this week.
The team at SentimenTrader notes that the GDXJ is one of the areas with the least investor optimism among the most active ETFs on the market. It has been struggling to break out of extreme pessimism territory for the fifth time in the past two years. So a powerful rebound is really, really overdue here as global financial risks rise.