U.S. equity markets were indeed quite volatile on Tuesday. Nothing not to understand about that. Coming off of Monday's sharp selloff and bullish reversal, traders (high-speed algorithms) tried to repeat the pattern on Tuesday. First the gap down opening, then followed the bullish reversal. Two things were quite different this time. One, trading volume was noticeably lighter, not light in the least, but lighter. Second, the bullish reversal failed, and developed into a bearish re-reversal. The result was that the S&P 500 gave up 1.2% for the session after having been down as much as 2.8%, and the Nasdaq Composite surrendered 2.3% after having been down 3.2% at the day's nadir. Both of these major large-cap indices produced what is known as an "Inside Day" on Tuesday.
From 10,000 feet, the S&P 500 looks like this, with that rebound on Monday shown as a near perfect move off of a 38.2% Fibonacci retracement of the November 2020 through early January 2021 rally...
Now, as we zoom in for a closer look, readers will note some more detail...
What is key here is... One, on both Monday and Tuesday, the index was soundly rejected close to it's own 200 day SMA (4431). Two... a two day pattern known as an "inside day" had developed. An inside day, for the new kids, describes precisely what it sounds like. The high on Tuesday was lower than the high on Monday, and the low on Tuesday was higher than the low on Monday. I show you the S&P 500 here solely because of the interaction with the 200 day SMA. The inside day pattern is also clearly visible for the Dow Transports, the Nasdaq 100, the S&P Midcap 400, the Russell 2000, the S&P Smallcap 600, and the Philadelphia Semiconductor Index. Tuesday's action did not produce an inside day for the Dow Industrials.
What does an inside day tell us? Not a whole lot. While inside days are often seen as patterns of continuance, and the recent trend has been lower, today (Wednesday) is also Fed Day, and the outcome of such a potentially significant news event (not to mention, the subsequent press conference) would be technically unpredictable. What an inside day almost always signals is a period of reduced volatility, which is something that I think most of us, even the pure traders out there, are ready for.
On That Note...
Microsoft (MSFT) reported on Tuesday night. The software giant beat on both the top and bottom lines. The stock sold off hard immediately in after-hours trading, on (though results were quite strong) perceived weakness in Azure cloud growth, as whispers may have been for something more. U.S. equity index futures sold off with Microsoft.
Once the conference call concluded and guidance that alleviated any such ridiculous (Sarge sounding defiantly arrogant here) fears had been provided, Microsoft, which is indeed a Sarge fave (and I had added to on weakness on both Monday and Tuesday, including after-hours), recovered nicely, taking those equity index futures higher with it.
At zero dark-thirty on Wednesday morning, European equities, most Asian equities (ex-Japan), key cryptocurrencies, crude oil, and of course U.S. futures markets are all adding risk ahead of the Fed. Yields are slightly higher at this time from the belly of the Treasury curve on out to the long end.
Paradise By The Dashboard Light
I gotta know right now!
Before we go any further
Do you love me?
And will you love me forever?
- Steinman (Meatloaf), 1978
The way I see it, there are several questions traders, investors, and all participants in the U.S. economy want answered this afternoon. Probabilities are that while full answers will almost never be offered in these statements, or at these press conferences, that today, more so than on most Fed Days, partial answers that almost signal overt policy intent will almost certainly be given.
At 2 pm ET, the FOMC will release their official policy statement. Remember that on the regional district level, Chicago Fed Pres. Charles Evans, Atlanta Fed Pres. Raphael Bostic, San Francisco Fed Pres. Mary Daly, and Richmond Fed Pres. Thomas Barkin are all out as voting members in 2022. That's three out of four with histories of being outspokenly dovish.
Replacing those four will be Kansas City Fed Pres. Esther George, Cleveland Fed Pres. Loretta Mester, St. Louis Fed Pres. James Bullard, and Philadelphia Fed Pres. Patrick Harker who is an alternate and will be voting in place of Boston, where there is still no permanent leadership in place. Among that group you have two with very hawkish reputations and two that tend to be pragmatic. No real perma-doves amongst them. In addition, the Board of Governors is playing shorthanded, as both Richard Clarida and Randall Quarles are no longer with the central bank and have not yet been replaced.
The Fed must signal a lift-off this afternoon for their target for the Fed Funds Rate. Significant changes must be made to the fourth paragraph of the statement today. This is the paragraph in December where the FOMC pledged to keep the FFR between 0% and 0.25%, while also announcing the intention to increase the balance sheet (QE) by $40B in Treasury securities and $20B in MBS (mortgage backed securities) per month from January.
I think it highly likely (or at least it should be) that the FOMC puts an immediate halt to QE purchases. I do not expect anything concrete put in print regarding quantitative tightening, and if it does somehow get into the statement, I would think that the words would be extremely careful and leave the bank more optionality going forward than most of us would like.
The Press Conference...
This is where it gets dangerous (or not) for financial markets. Surely, the Fed Chair will be pressed this afternoon on the Fed's ability to fight inflation and support labor markets should economic conditions continue to deteriorate. The Chair will be pressed on QT (The balance sheet roll-off) and will try to evade anything that sounds like it is written in stone. Remember, March 16th is a long way from January 26th. March 16th is also the next opportunity to back any changes in policy with economic projections. The next such (regularly scheduled) opportunity will not arise again until June 15th, so it is imperative that the Chair sets up March correctly while retaining enough flexibility to ensure credibility regardless of outcome. The Fed Chair will not bring up the "equity market put", but you can guarantee that the financial media will.
Word is that there is growing unity between the U.S. (NATO) and the EU on a financial response that would cripple Russian banks in the event of a Soviet, I mean a Russian invasion of parts of Ukraine not already occupied.
The U.S. Department of Commerce has warned that (semiconductor) chip inventories have dropped to an average of five days' supply versus the pre-pandemic norm of about 40 days. U.S. Commerce Secretary Gina Raimondo urged Congress on Tuesday to pass the Chips Act, which would unleash $52B in enticements and subsidies meant to provoke the domestic manufacture of these chips. The bill has already passed in the Senate, but has hit a wall in the House.
According to Bloomberg News, it appears that Nvidia (NVDA) is preparing to abandon it's $40B plan to acquire British ship designer Arm Holdings, announced way back in 2020, due to regulatory hurdles across a number of nations, including the U.S. Softbank (SFTBF) is expected to pursue an initial public offering for ARM as an alternative as there is probably no other player in the field in a position where they could make a run at ARM, and Softbank does have some bills to pay. You pal has been adding to his core long position in NVDA this week on weakness.
Roll Back Prices
With the ARK Innovation ETF (ARKK) down 27% year to date, and down 55% from it's early February 2021 high, ARK Invest founder Cathie Wood said, "Innovation is on sale, and it will be really important to investors to get to move towards the right side of change, given the amount of disruption that we do expect." Before you throw stones, are you sure she's wrong?
Careless over the plain away,
Where by the boldest man no path
Cut before thee thou canst discern
Make for thyself a path!
- Johann Wolfgang von Goethe, 1836
Economics (All Times Eastern)
08:30 - Goods Trade Balance (Dec-adv): Last $-97.78B.
08:30 - Wholesale Inventories (Dec-adv): Expecting 1.2% m/m, Last 1.4% m/m.
10:00 - New Home Sales (Dec): Expecting 762K, Last 744K SAAR.
10:30 - Oil Inventories (Weekly): Last +515K.
10:30 - Gasoline Stocks (Weekly): Last +5.873M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:30 - FOMC Press Conference.