Monday, March 13th - Is The Market Out Of Steam? My Weekly Market Prognosis
Medium-Term Horizon, Gold, Macro, Portfolio Strategy
Seeking Alpha Analyst Since 2014
Summary
- Mental Warm-up.
- Upcoming Market Events.
- "If A Then B" Market Prognosis.
- Sector Outlook: Gold, Volatility & More.
Weekly Market Outlook Project - A Brief Introduction:
What separates a good speculator from a great one? What separates a good athlete from a professional? At first glance, there isn't a lot in common between a stock market speculator and a professional athlete, but they share many underlying characteristics; robust and competitive work ethic, rapid decision-making capability, and fortitude during times of adversity just to name a few. What differentiates the tenderfoot from the expert, aside from experience, is the level of preparation and reflection that the expert puts forth. I believe that adequate mental exercises and self-reflection procedures are vital to success in any field, but are often overlooked when it comes to speculating the financial markets. The purpose of this project is to provide an interactive curriculum for you - the reader to follow.
The Breakdown: These posts will start with a mental exercise to engage the memory and recall significant events and market patterns, think of it as a warm-up. I then continue to my market prognosis and finish by counting the predictions I've made, which I will reflect on the following Sunday.
"It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market, and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind."
― Edwin Lefèvre, Reminiscences of a Stock Operator
Mental Exercise:
Answer the follow questions, preferably in written form:
• Recall the general trend of the market this week
• Recall one significant to you price pattern, what does it communicate?
• On what day do you think the market will have the biggest move, why?
• What do you think will be the most profitable sector, why?
My answers to these questions are at the end of the article.
Pivotal Events:
Monday 13th: Labor Market Conditions Index, China: Industrial Production & Retail Sales
Tuesday 14th: NFIB Small Business Optimism Index, PPI - FD, Eurozone: Industrial Production
Wednesday 15th: FOMC Announcement & Forecast, Bank of Japan Announcement, Consumer Price Index, Retail Sales, Empire State Mfg Survey, Business Inventories, Housing Market Index
Thursday 16th: Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index
Friday 17th: Industrial Production, Atlanta Fed Business Inflation Expectations, Consumer Sentiment, Leading Indicators
My Market Prognosis:
March 1st was the day that the S&P hit its high of $2,400 and started to retrace from the level of resistance. Perhaps the decline is due to the anticipation of the FOMC announcement, scheduled on Wednesday 15th. If that is the case, this week should be full of revelations and insight into the future direction of the stock market. It is common for economic insight to influence market behavior leading up to a major event, such as the FOMC decision and was seen Friday 10th when the center of attention was the Employment Situation report. A low unemployment level is, of course, desirable & that number turned out to be 4.7%, suggesting that the labor market is at the full employment level. Inflationary pressures as measured by the Personal Consumption & Expenditures (PCE) are also approaching the Feds 2% target, at 1.9%. The stock market is near all-time highs, and there is general confidence in the economic outlook, what is the Fed waiting for, shouldn't they raise? Yes. Yes they should. And I'm confident that they will. So what would it mean for the market if the Fed does raise interest rates on March 15th? Well, raising interest rates is typically a good thing, it suggests that the economy is strong and the prospects high. The short-term effect of interest rates, however, hinders economic growth because the cost of borrowing money is higher and that is why the initial reaction to a hike is declining prices.
I will not attempt to predict the intraday market moves because there is no sense in taking guesses. Instead, I will try to predict the psychology and investor behavior as we approach the Feds decision and its aftermath. I think that the market has partially priced in a rate hike. Therefore, there shouldn't be any significant market movement. Why? Because if there's selling occurring as a result of uncertainty, investors will buy the promising stocks at a discount, knowing that the bull market will continue even after a hike. A weaker market is anticipated before the decision, but there shouldn't be any significant swings. I think that instead of selling their positions investors will rather hedge themselves by betting on volatility - CBOE Volatility Index (^VIX) when they see the market down. That is my first bet; that the market will be mildly down & (^VIX) or Short-term futures such as UVXY will be up leading to Wednesday. Gold may also outperform, but the stronger dollar may intervene.
Wednesday morning the market will open lower but recover some losses building up to 2:00 PM, the time of the announcement. If the Fed raises (I think they will), depending on how much of the move is priced in prior to Wednesday, the market will fall lower until the dip gets bought at support levels. It could be right after the announcement; it could be Friday 17th or Monday 20th. I think that the dip will be bought sooner rather than later because of economic confidence and the strength of the dollar neutralized by the rising inflation. I expect gold to fall initially as well, whether the dip gets bought will serve as insight to how confident investors are. If they think that inflationary pressures are lessoned, and the dollar will appreciate in value, and if they don't see obstacles and uncertainty up ahead, gold will continue to fall because no one will buy it. I don't think that will be the case. Gold may have a steeper decline than the market, and its fall could last longer, but I believe that gold (GLD) will be up by the end of the month.
Answers to Mental Exercise:
1. Markets were down almost every day this week until Thursday 9th, before the close, markets rallied in response to a strong employment report.
2. Thursday's reversal was what I found interesting because it gives insight into how people will react leading to Wednesday, a mild but steady decline until the FOMC raises, the markets fall and recover as they did Friday.
3. Wednesday because of the FOMC announcement and all the economic data coming out that day.
4. I think Financial Sector (XLF) will benefit from higher rates, but medium-term, I think gold will post large gains.
Prediction Count:
1. The market will decline before Wednesday, UVXY will be up.
2. Fed will raise
3. Markets will dip then rally by the end of the week, Monday latest.
4. Gold will be up by the end of month
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.