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Four Questions and Answers (1981-2017)
Expectations High For Rate Hike
Markets do not like surprises. If the Fed raises interest rates at Wednesday’s FOMC meeting, it is not likely to be placed in the unexpected category. From The Financial Times:
“Investors are placing a near 100 per cent chance of a Federal Reserve interest rate hike later this month – the first tightening of monetary policy under the presidency of Donald Trump.”
Wednesday’s Fed extravaganza features a press conference and updated forecasts from FOMC members.
Rare And Rapid Shift In This Market Indicator
This week’s stock market video covers a rare shift that has only occurred a handful of times over the past 35 years.
Labor Report Checked Last Box
The Reuters consensus forecast heading into Friday’s monthly labor report called for a gain of 190,000 jobs. The report came in above expectations with a print of 235,000. From Reuters:
“Wall Street’s top banks were unanimous on the view the Federal Reserve will increase interest rates at its policy meeting next week following a stronger-than-forecast February U.S. payrolls report, a Reuters poll showed on Friday. “It ticks all the boxes for the Fed to move next week,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York.”
Indicator Flips (1982-2017)
Stocks Inside Box Since 1982
The Value Line Geometric Index is a broad, equally-weighted index that can be used to monitor the health of the stock market beyond the capitalization-weighted S&P 500.
As shown in the monthly chart below, the orange box acted as both support (green arrows) and resistance (red arrows) several times between 1982 and 2016. At the end of February 2017, the Value Line Geometric Index closed above the orange box; a potentially bullish development from a long-term perspective.
The concept of consolidation, or a rectangle, as outlined on StockCharts.com:
Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout.
35 Years May Be Significant
From a longer-term perspective, if the breakout holds, the length of time the Value Line Geometric Index spent inside the box could be very significant. From StockCharts.com:
Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6-month pattern might be expected to exceed its breakout target.
Reviewing The Breakout In Detail
This week’s stock market video covers two major developments, including the long-term breakout in the Value Line Geometric Index. The coverage of the Value Line Geometric Index begins at the 6:39 mark.
Time Will Tell If The Breakout Can Hold
Since breakouts can fail, we will not know the significance, or lack thereof, of the recent push above the orange box for several weeks or months. Breakouts are often retested, which also calls for an open mind in the coming weeks.
In terms of keeping an open mind about the breakout holding, other developments, including a turn in the True Strength Index and a Bollinger Band “price surge”, also lean bullish from a long-term perspective.
Two Major Topics Covered
Only Three Other Occurrences Since 2002
The True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes. As shown in the monthly S&P 500 graph below, a positive momentum crossover (black moves above red) has only occurred four times since 2002. In the three previous cases, the S&P 500 rallied for a long period of time after the crossover; the average gain was 52%.
Indicators Speak To Probabilities
Since no indicator can predict an uncertain future, the bullish crossover that recently occurred helps us with the probability of goods things happening relative to the probability of bad things happening over the coming months and years. Signals on monthly charts tell us little about the next few hours, days, and weeks. From Stockcharts.com.
As with MACD, a signal line can be applied to identify upturns and downturns…TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price.
Do Other Long-Term Indicators Align With TSI?
The True Strength Index tells us long-term momentum has improved in a bullish manner. This week’s video looks at other ways to monitor the strength of the current rally by comparing 2017 to major bullish and bearish turns since 1996.
Bullish Cross Came After Election
Markets move based on an almost infinite number of factors, including anticipated regulation and fiscal policy. The True Strength Index had a much more concerning look prior to the U.S. Election. In the figure below, monthly TSI for the S&P 500 as of October 31, 2016, is shown on the left. The same indicator is shown as of February 27, 2017, on the right.
President To Address Congress
Markets will be looking for new information on tariffs, taxes, regulation, and infrastructure when President Trump speaks to a joint session of Congress Tuesday. From NPR:
This week the White House has hinted at a different mood, using words such as “sunny” and evoking the memories of President Reagan’s often heart-tugging rhetoric in his speeches to Congress and the nation. We can expect to hear more about what’s going right in America.