Next Week’s FOMC “Fix” Won’t Have A Lasting Affect!

During periods of uncertainty, it’s common for me to take inventory. Here's where we stand. Technically, the market is in a five-year up trend. It is above key horizontal support at SPY 146 and it has climbed above the 200-day moving average. We are in a seasonally bullish period and there is short-term upside momentum. Those are all positives. On the negative side of the ledger, the market has formed a heavy resistance level at the all-time highs. The 5-year chart reveals that the rally has lost its momentum. It recently broke the significant technical support levels mentioned above and each decline this year has taken longer to recover. Fundamentally, the P/E ratios reflect reasonable stock valuations, corporate balance sheets are flush with cash, employment is robust, interest rates are low and inflation is "in check". The downside is that conditions are changing and our future has been mortgaged. On a federal, state, municipal and personal level, debt levels are at all-time highs. In the last few weeks, the economic data has revealed a slowdown. On the surface, all seems fine. However, if you look behind the numbers, there are concerns. The GDP came in as expected, but only because of an inventory buildup, durable goods orders looked in-line, but a 16% rise in defense spending saved the day, retail sales were in line, but only 4 merchants hit their estimates while 15 missed, home sales ticked higher, but home prices posted their largest one-month decline in 26 years, a government initiated “mortgage reset freeze program” will help many home owners, but mortgage defaults hit a 20 year high, the Unemployment Report came in better than expected, but the growth rate declined and the Fed is forecasting a rise in unemployment next year, interest rates are headed lower, but our creditors don't want to hold our currency. My conclusion is that the market has formed a top. This doesn't mean that we are heading to “hell in a hand basket”. It does mean that you should be prepared to trade both sides of the market. I believe we will trade in a wide range for many months. Next week will be fueled by the FOMC meeting. A .25% rate cut is baked in. The market is addicted to monetary easing and once the "high" wears off, it will be searching for its next fix. At the current pace, the Fed will quickly run out of bullets. As I outlined last week, these rate cuts will not pack the same punch as the ones we saw after 9/11. Consumers are tapped out and that will be reflected in the retail sales numbers that are released towards the end of the week. I also believe that the inflationary affects of a lower dollar will be reflected in the PPI (Thursday) and CPI (Friday). I expect a quiet day today. The market tried to rally off of the Unemployment Number and it hit selling pressure. We are above a technical resistance level (SPY 149) and that is a positive. However, the market has already staged a big rally this week. Traders will be passive ahead of a weekend that is quickly followed by an FOMC decision.

Daily Bulletin Continues...