On Thursday morning, the dust was still settling from Jerome Powell's appearances on Capitol Hill.
The bi-annual event, sometimes referred to as "Humphrey-Hawkins testimony," involves a televised grilling of the Fed Chair before each house of Congress. One by one, elected officials demonstrate their tenuous grasp of economics on live TV, in an effort to impress voters who they must believe know even less about that topic than they themselves.
However, this week's event provided more than just unintentional comedy. Powell's testimony changed the polarity of the markets, at least temporarily tilting control from the bulls to the bears.
It also pushed the S&P 500 back below an important trendline (green dotted line). That trendline has been intact since October, and is the key to determining if the current bull trend will continue, or if it is about to end.
Chart Source: TradeStation
On February 28, I wrote, "Grab your popcorn, kick up your feet, and get ready for the sparks to fly." March is off to a volatile start. With the February employment report hitting Friday at 8:30 a.m., and the consumer price index inflation report due on Tuesday morning, the fireworks are likely to continue.
The article included: "It's my belief that the 200-day moving average is now the key to this chart in the near term." Two days later, the S&P 500 rocketed higher after testing that moving average (arrow).
That boost was aided by Raphael Bostic, president of the Atlanta Fed, with comments that now seem at odds with Powell's testimony. Bostic indicated his support for a quarter-point rate hike, and seemed to suggest the Fed was just 50 basis points away from the so-called terminal rate, the rate at which the Fed could end this rate-hike cycle.
After Powell's testimony, the probability of a 50-basis point rate hike at the Fed's March 21-22 policy meeting jumped dramatically. The CME's Fed funds futures contracts are now indicating that we are 100 basis points away from the terminal rate, which should be reached in October.
Chart Source: CME
This shift in interest-rate expectations had a direct effect on stocks. One could say that Bostic pushed the S&P 500 above its trendline, and Powell smashed it back down.
Finally, take a look at the circled area on the trendline itself. The S&P 500 has now spent two weeks vacillating along that line, with no resolution.
As before, there is no point in opening new positions (or closing old ones) until this battle is resolved. Keep a close eye on price action if the S&P 500 retests 3940, the current location of its 200-day moving average. And don't forget to refill your popcorn bucket.
