The Great Rotation To Risk-Off

| About: SPDR S&P (SPY)

Summary

On Friday, October 14th we got the latest reading for the GDPNow Forecast for the 3Q.

Whatever your belief on the pending December rate hike, it does not matter.

Clearly, from looking at the information, the market has a full on shift occurring.

Opening Rant

On Friday, October 14th we got the latest reading for the GDPNow Forecast for the 3Q. It now reads, for 3Q GDP to come in at 1.9%. This reading is down from a reading as high as 3.6%, back at the beginning of August.

(Source Data From Atlanta Fed)

As for the accuracy of the GDPNow forecast, you can once again judge for yourself, but in my opinion, the GDPNow forecast has been stronger than the actually GDP readings, recently.

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As you can see from the chart below GDP Growth measured Y-O-Y has only been over 3% two times since 2010.

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Yes, one can see we are in desperate need of an interest hike before years end. Perhaps all of the investors that want a Fed rate hike also want to send the economy into recession. Perhaps.

Markets & Sectors

Whatever your belief on the pending December rate hike, it does not matter. As the only opinion that matters is the markets. The market seems to believe that a rate hike is coming in 2016 and it would appear that with every day that passes it continues to brace itself. Even though the S&P 500 (NYSEARCA:SPY) is down 15bps today, to 2130. On September 21st, the day of the last FOMC meeting, the S&P 500 closed at 2163.

As for now the different sectors within the market are telling us, Risk is off.

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The only sector that is up is the Energy Sector (NYSEARCA:XLE), and that is because of the potential OPEC Oil deal. If were not for this I'd think the XLE would be lower as well. Just look at the pounding the Biotech (NASDAQ:IBB) and Healthcare (NYSEARCA:XLV) sectors have taken, down 10% and 4% respectively. Meanwhile, the higher yielding parts of the market such as the Utilities (NYSEARCA:XLU) are down nearly 6%. The one sector that should be up are the Financials (NYSEARCA:XLF), and they are just barely flat. The equity market seems to be cutting riskier areas, and truthfully, I'm not even sure where it is rotating. It is not rotating back into stocks; that is for sure.

Yield & Currency

In fact when we look at Bonds, Currency and few other select things it becomes quite clear what is happening.

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Apparently, the market is preparing for a rate hike to come this December. November no matter what anyone says is off the table. The November meeting is to take place on November 1st & 2nd. The hotly contested Presidential Election is to take place one week later on the 8th. No matter whether you believe the Fed is political or not, I just could not see them making a move a week before an Election.

How Do We Interpret This?

The markets are preparing not only for a rate hike but also a period of likely higher volatility. If we remove Oil (NYSEARCA:OIL) from the equation since there are potentially outside forces here at work. We can conclude all of this by just observing the strengthening Dollar (NYSEARCA:UUP), rising yields (NYSEARCA:TLT), falling commodity prices (NYSEARCA:GLD), and rising VIX (NYSEARCA:VXX).

Summary

Clearly, from looking at the information, the market has a full on shift occurring. The Risk-On mindset of Post Brexit has clearly shifted to a Risk-off mindset, as the market prepares for a December hike. My opinion is that the Fed should not raise rates this year at all. The market has a different view. For now, it would seem that I am heavily outnumbered. However, this will not be the first time nor the last time I have been outnumbered. Remember it was just January when market pundits saw FOUR rate hikes coming and were completely wrong. I disagreed in January, I was right in then, maybe I can get lucky for a second time.

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Have a great day!

Mike

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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