Markets Have Regained Strength on Fed Decision, but Is the Breakout Confirmed?
When a breakout of this nature occurs, there are additional mechanisms that have to come to fruition to ensure the move is not only fruitful, but also substantiated.
On a purely technical basis we lean toward my firm's Cyclical Trend Index (or CTI). Although it has recently given way to shifting from neutral to bullish, it remains in a bull ‘unconfirmed’ stance -- a step in the right direction. Conversely it has yet to provide such confirmation to call it ‘bull confirmed’ (above 90%). In analyzing CTI over the last 50 years (since 1962) it has directed, with absolute confidence, cyclical stages by identifying tops and bottoms within the larger secular (5- to 20-year) stances. Nonetheless, until the CTI reaches a confirmed stance there remains a semblance of risk, possibly in the form of a false breakout as the market rallies toward the secular channel resistance (or SCR) in place for the last 12 years.
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Not to continue pontificating on the Fed’s decision and end this piece playing Negative Nancy, but this action, with all the QEs (1, 2, and 3), is meant to kick-start an engine which has seemingly stalled. The question is really bifurcated in that many are asking whether the Fed’s action is doing nothing more than supporting the thought of regaining strength and simply buoying the ship; it's putting a Band-Aid on a broken arm. In attempt to understand investors must look at a market which is pushing against the SCR as GDP is growing at 1.5% with 8%-plus unemployment, again, asking the aforementioned question.
For as long as I’ve been privy to be in the industry we’ve heard the adage, “The market is the greatest leading indicator for the economy.” I wonder if that is still the case considering where the market is in relation to where the economy is. Last week my firm was in NYC speaking on a panel for family offices. We ended our market commentary by saying, “…there is reason to believe, based on a weight of evidence and probabilities, the market has entered yet another short-term bullish stance. Yet, in this environment we would rather fly with a parachute strapped on our back than without.” For now, in our humble opinion, investors can plausibly go along for the ride as long as they are nimble enough to shift if signs change.
We hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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