FOMC Statement Thursday Will Determine the Year-end Rally

Posted 9:30 AM ET - The elections are over and the market has some clarity. Republicans will gain two seats in the Senate and Democrats will control the House by an estimated seven seats. Unlike 2016, the polls got it right. The S&P 500 is up 18 points before the open and it will challenge the 200-day MA. We can expect gridlock for the next two years. The House will try to stop Trump's agenda and he will be burdened with special investigations and impeachment hearings. We could also see a government shutdown when the next budget battle surfaces. Trump was proposing another round of middle-class tax cuts and that is unlikely to happen. Republicans have new senators that are more closely aligned with Trump's agenda so they are likely to be more unified. The market still has a big hurdle to clear tomorrow. Fed officials have been hawkish and they will release their statement at 2:00 PM ET. If their tone does not soften the market will drop. Traders want signs that they are at the end of the tightening cycle. That could mean that the December rate hike is postponed or that fewer rate hikes will be needed in 2019. Asset Managers are worried that the Fed is not taking sluggish global growth into account and that they are moving too quickly. I believe the correction in October will soften their tone tomorrow. To trade deals are in limbo and that will weigh on the market. Trump and Xi will meet in three weeks (G20) and nothing will happen until then. That meeting has been tenuous and now that the elections are over I believe Trump will take a harder stance. The EU can't figure out Brexit after 3 years and they won't think about the US trade deal until their feet have been put to the fire. The EU is also struggling with a member (Italy) that plans to run a huge deficit next year. This has credit implications. Swing traders should remain in cash. The election results went as expected and the result is market neutral. I don't trust the relief rally this morning and we will see if the 200-day MA can hold through the FOMC meeting. Tomorrow's statement is critical to a year-end rally. Day traders should watch for early signs of a reversal. Opening gaps higher have been faded in recent months. Nothing has changed overnight and I'm more bearish long-term. Use the first hour range as your guide today. The market is oversold and seasonal strength is in play. Valuations are reasonable at a forward P/E of 15.5 so the market has room to run. If the Fed maintains its hawkish stance I believe the highs of the year are in. In fact, we will be lucky to reach the 100-day moving average. If the Fed postpones the December rate hike we could rally to the high. The heavy selling we saw in October is a warning sign. Political gridlock, tariff wars, sluggish global growth, rising yields and tougher comps in Q4 have altered my bias. I am fairly bearish moving forward and I believe that a year-end rally will be strained. The headwinds are blowing. . .

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