January Reflects Powell's Influence In The Stock Market

Ivan Martchev profile picture
Ivan Martchev
1.29K Followers

Summary

  • If Powell started to taper in December and plans to be finished by March, that means his $120 billion monthly QE rate will go to zero in three months.
  • Lower levels of QE may not be the same as outright QT, but because the QE intervention was more extreme during the Covid Fed intervention, the removal of those infusions of electronic dollars into the system is making the stock market shake, as in late 2018.
  • The market is oversold enough for a decent-sized rebound, but the Fed has the power to override these oversold readings with open-market operations.

Digitally enhanced shot of a graph showing the ups and downs shares on the stock market

shapecharge/iStock via Getty Images

As we wrap up the worst January in U.S. stock market history, I can’t help but think about the parallels to December 2018 (see chart below). I see a lot of similarities, as back then we didn’t see two back-to-back up days until after the actual bottom on Christmas Eve. Back then we had quantitative tightening to the tune of $50 billion a month in balance sheet shrinkage. Now we have a tapering of quantitative easing to the tune of $40 billion less per month in QE. If Powell started to taper in December and plans to be finished by March, that means his $120 billion monthly QE rate will go to zero in three months.

S&P 500 large-cap index chart

SPX (StockCharts.com)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Lower levels of QE may not be the same as outright QT, but because the QE intervention was more extreme during the Covid Fed intervention, the removal of those infusions of electronic dollars into the system is making the stock market shake, as in late 2018. And he has not even started any real QT...

S&P 500 large-cap index chart

SPX (StockCharts.com)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I write these commentaries on Sundays, and most of you read them on Tuesday mornings. Clearly, I will not know what the close of Monday’s trading will bring (closing out the month of January), but suffice it to say that if it turns out that we hit some kind of intermediate-term bottom last week, some follow-through buying should be expected. The market is oversold enough for a decent-sized rebound, but the Federal Reserve has the power to override these oversold readings with open-market operations.

The stock market is trading like it is in the latter stages of a bear market, which is bizarre, as the S&P 500 hit fresh intraday all-time highs on the second trading day in January. In the late stages of a bear market, the market tends to gather momentum to the downside and doesn’t even hit its 10-day moving average until it hits a selling climax. We are doing the same here, falling without tagging the 10-day moving average for two weeks without two back-to-back up days, yet this is not the late stage of a bear market.

I see a lot of similarities to what happened in December 2018, when Jerome Powell was under pressure from President Trump and he over-tightened monetary policy just to show his independence.

VIX Volatily Index chart

VIX (StockCharts.com)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Volatility is also similar to the Omicron bottom in early December. A lot of indicators have lined up for a bounce, but the Fed remains a fly in the ointment. They can override such setups. Let’s see if they will.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

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Ivan Martchev profile picture
1.29K Followers
Ivan Martchev is an investment strategist with Navellier Private Client Group. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser's Mutual Funds Newsletter and associate editor of Personal Finance Newsletter. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool and others. Currently Ivan is a weekly editor of Navellier’s Market Mail and a contributor to Marketwatch.

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