Tuesday, March 7, 2017

Equity Index(s) Stumble

Most every economist and Fed Watcher is pointing to the employment report on Friday (March 10) as the last hurdle to meet before the Fed removes another modicum of policy accommodation.  Fed officials have coached that continued progress in achieving employment and inflation goals would mean that the March (14-15) FOMC meeting would be ‘live’, or in other words under consideration for a hike. 

The consistency with which this message has been offered of late by both hawks and doves on the Fed Committee has been reason enough for market participants to price as much as a 98% chance this morning of the Fed increasing the policy rate by 25 basis points.  Economic data and improved financial conditions have of course led Fed officials to lean toward a sooner policy response. 

Though keeping an eye toward late-week employment data, let’s too, watch closely an area which can quickly change the direction of thinking.  While currently obscured the nearness of the employment report and the cloud of Trump Tweets, the equity market has just stumbled on a small pebble.  Had year to date equity gains not been as strong, we might be less concerned.  However, the S&P 500 Index was higher by more than 7% on the year, by the first day of trading in March.  


Interestingly, for those following Candlesticks, on March 1st the March S&P 500 Emini (ESH7) contract achieved a 12th new high without a protracted pause – a sign of extended or overbought conditions.  This same contract formed a bearish engulfing pattern in the two session’s marking this top.  Finally, more than half of the extraordinary March 1, single session, 29 point open to close gain - the largest open to close gain since September, were relinquished within the following three sessions (Monday March 6th).  Together, these developments give ample warning about the potential for a bearish equity correction.

If there is an equity correction of significant portion, it could give pause to an otherwise, seemingly determined Fed, from a policy rate response at its upcoming FOMC meeting on March 14-15.  Over the last ten days, the market (for fed funds futures) has priced the odds of a rate hike next week from 32% to 98% or nearly a sure thing.  Does that swing in expectations leave it yet in flux? 

Those positioned strongly for a Fed policy response next week might consider hedging that expectation with a short position in equities. 

Those who had followed my February 15th note ( ‘Dow Industrial Average Rhyming Bullish’ ) and put in long at then 20,569 might consider exiting bullish positions following the 1.7% advance to date.  


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