The Strong Reaction To The Heightened Certainty Of A Rate Hike

September 28, 2015 - 5:22pm

 by Gary Wagner

It’s easy to think of today’s scorching-hot meltdown in equities, precious metals, oil and a majority of agricultural commodities, bond yields and the U.S. dollar as cyclical, corrective or somehow coincidental.

In fact, the meltdown is part of a continuation of the volatility that stems from the uncertainty surrounding the Federal Reserve’s rate stance. Janet Yellen’s speech last week aimed the arrow right at the heart of what has been feared for almost two years now: she says rates will definitely rise “this year” unless the Rockies may crumble and Gibraltar may tumble into the sea.

The Dow is off almost 2.00%, the S&P 500 2.5% and the NASDAQ off almost 3.00%. European bourses were also off on about the same spectrum, the CAC doing the worst.

Shanghai and Hong Kong were up ever so modestly. The Nikkei was down 1.5%.

Why should one small, probably insignificant rate rise have investors spooked? There is a relatively easy answer.

Nothing seems to stand in the way of large-scale economic upheaval except the Fed. And a simple application of interest rate change is a bit like the use of a cotton swab in a trauma center treating victims of a five-car pileup. What if Fed members are wrong? What if they’re right?

The U.S. Congress and to a certain extent President Obama have neglected their duties to see to it that the country as a whole prospers. Part of that charge is keeping up and growing the economy. Reducing our critique to simplest terms, the federal government has done next to nothing to spur economic growth, ignoring fiscal policy and instead relying strictly on monetary policy (the Fed) to do the job.

At this point, it is not important if the conflict between parties and between Congress and Mr. Obama is ideological, careless or myopic. The fact is that there have been no large federal initiatives for some time – infrastructure comes most readily to mind but there are other initiatives such as space technology, public lands improvement (a form of infrastructure) or a jobs program for youth, Hispanics and African Americans.

There has been an incessant hammering on lower taxes (we hear Republican candidates promising to lower taxes time and again when we know trickle-down economics is essentially a sham). Worse there is a crack-head rightwing hammering on the very value of government as a force for good in the social realm.

Congress in partnership with the president must help stimulate the economy. Once more, infrastructure is key, but it’s also important for banks to begin issuing regular mortgages for regular people, especially the young. In our mind, Wall Street banks were bailed out and now it’s time the banks – prudently but with alacrity – help Main Streeters own homes, start business and allow for a restructuring of college loans. The last is particularly egregious because those who bought into the idea of college as a sort of universal good have been penalized the most during this overall uncertain times we live in.

However, we are not optimistic. The resignation of John Boehner of Ohio as Speaker Of The House will be an enormous distraction. While Boehner was not a champion of democratic socialism, at least he believed in the power of government to create a better society.    

The battle for his leadership position will keep many, many minds busy in DC and prevent an agenda from being drawn up.

There is no other game in town. That is why the Fed is watched so painfully closely.      

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

We have no active trades in either gold or silver. We were stopped out of our trade today.

We went long gold at 1151.50, we were stopped out at 1132 (- $ 19.50)

Gold Market Forecast

Inasmuch as uncertainty in global markets can bring safe haven buying in true support to the precious metals markets we certainly did not see that today. Along with the precious metals complex, traders today witnessed an absolute breakdown in the commodities complex as a whole, along with the US equities markets.

Gold breaking below 1133 is absolutely significant as it breaks below an important support level. The next real support levels in gold are at 1121 and 1109. Although gold sold off almost 1.5% on the day it certainly was not the greatest percentage drawdown in the precious metals complex. Platinum, palladium and silver closed roughly 3% lower on the day, double the drawdown that we saw in gold.

Trending Markets: Proper Action

We are currently flat with no active trades in trending markets. It is my belief that our strongest play here could be initiating short trades in the E-mini S&P 500.

Trending Markets Forecast

At the beginning of last week’s trading we noticed some real weakness enter the US equities markets. On a technical basis we had identified a true compression pattern developing in which we had a series of ascending lows (higher lows), and a flat top. Most notably was the fact that we saw the range compressing. That indicated to us a potential break with a great release of energy. We certainly saw that emerge today with the Dow Jones industrial average closing off approximately 2% on the day, trading to the recent lows that we saw last week. Based upon our technical studies we would not be surprised to see a continuation of the downside pressure that has been so evident in the market over the last two weeks.