Early in the shortened trading week, the major indexes made fresh 2-month highs, but then turned back down to close off the week with a loss, the first in six weeks. The February durable goods orders data came in very weak on Thursday, causing the market to extend Wednesday's slide before recovering to some extent before the close.
Chicago Fed President Charles Evans stated the it was "not at all unreasonable" for there to be two rate hikes in 2016. This, coming from an enthusiastic dove like him made the bond market take a steep slide on Tuesday afternoon, reflecting the question; if he is thinking this way, what must the hawkish voting members be thinking?
We seem to be in an indecisive stage with both weak and moderately good economic readings; durable goods orders, and existing home sales were weak; new home sales were in line, and oil is in recovery. If the NFP employment numbers come in weak next Friday, then the FED may be forced to change their hawkish schedule, but employment numbers have been strong so we remain indecisive. The CME FED tool is showing an 11.5% chance of a hike in April, and a 41% chance of a hike in June. The FED is desperate to raise rates so it can be seen as a success, which means that even mildly positive data will suffice.
The chart below is an updated version of last week's chart, which shows the trading patterns off of the S&P lows (green arrows). After a minimum, the S&P rallies and the bull sentiment and Rydex bull funds increase, while the bear sentiment and bear funds decrease. This tends to be followed by corrective trade (pink parallel lines) where the bull sentiment and the bull funds both drop, and the bear sentiment and bear funds both increase.
Still looking at the chart above, we note that high levels of Rydex bull funds (green circle) signal topping action on the S&P, while high Rydex bear fund values (red circles) occur at S&P bottoms. The situation at the moment is neutral, the same as our Price Modeling System; the bull and bear sentiment indicators may be turning (orange oval), but it's still too early to confirm; and the Rydex funds are both moving toward a topping formation (purple ovals), but here again they have room to move further.
The probabilities are fifty-fifty that we have reached the top of the expected range trade. This means there is a fifty-percent chance that the S&P turns and moves higher (question mark on the chart).
Gold finished down for the third week in a row, and as last week's updated chart shows (below), gold is once again trading in correspondence with the 30-year bond and is trending down.
Bonds had the opportunity to move higher on the back of Thursday's poor durable goods data, but the bids disappeared in the afternoon, likely signaling a continued decline (i.e. expectation of rate hikes). Rate hikes will affect gold because of the effect they have on the US dollar; higher rates = stronger dollar = weaker gold price.
In conclusion, our probability calculation for equities is neutral (could go either way), but we don't see the S&P making new highs in the medium term. We still calculate that gold will continue to drop.
Disclosure: I am/we are long GLL, DUST, JDST.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.