The Fed raised rates by 75 basis points this afternoon and stocks rallied strongly in response. Fed Chairman Jerome Powell said what bulls wanted him to, sending investors into “bear market rally mode” once more.
Very cool. Thanks, Mr. Powell. Everything is awesome again.
Or is it?
Tomorrow’s Q2 GDP report from the Bureau of Economic Analysis is virtually guaranteed to show that the US economy contracted last quarter. Earnings season has been a mixed bag, too, and many of America’s top corporations have already slashed earnings projections for the remainder of the year.
Meanwhile, in Europe, the European Central Bank only just started raising rates this month and natural gas prices hit a record high. Russian threats to shut off natural gas to Germany has caused several European countries to reduce natural gas consumption, potentially shutting off heat to European homes come winter.
Oh, and inflation is still running red-hot despite the Fed’s best efforts to contain it.
But none of that matters, now. Powell raised rates and the Fed says it’s willing to stop raising rates if the economy starts to weaken.
“Recent indicators of spending and production have softened,” read the FOMC’s post-meeting statement.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.”
That’s music to bullish ears. Powell did his best to keep things light in his post-hike press conference when he said that he didn’t think the US was in recession due to the 3.6% unemployment rate.
“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. This doesn’t seem like that now,” he said.
“The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”
Keep in mind that the last few jobs reports have been total bunk and not at all indicative of a strong economy. The last three months of data, for example, showed that the number of multiple-job holders has exploded higher. This led to big payrolls “beats,” as the jobs report’s establishment survey only tracks payrolls, not the number of workers – something the household survey portion does.
The jobs reports since March show a 1.124 million job gain (establishment survey) while the household survey shows a net employment loss of 347,000. That’s a discrepancy of about 1.5 million jobs.
Even without the wide gap between surveys, does a surge in multiple jobholders sound like something that would happen in a strong economy? Not at all. Labor isn’t necessarily strong right now, it’s tight. And the US hasn’t been in a recession when labor’s been so tight while inflation has been so high. The only comparison analysts can point to is the 70s.
But back then, the labor market was wide open and unemployment peaked at 9.0% in 1975.
For Powell, though, that doesn’t seem to be an issue worth mentioning. Now it looks like the Fed’s about to capitulate later this year, giving the green light to bulls.
The SPY rebounded off the 50-day moving average yesterday and is trading above the upper Bollinger Band (BB) after today’s rally. The stochastic indicator is still lingering near overbought territory as well.
However, the SPY has also cleared the 10, 20, and 50-day moving averages. That’s an auspicious sign despite the market’s otherwise overbought condition.
And so, traders may want to remain long in the event that stocks push higher from here. But it may also be prudent to bail at the first sign of trouble, as we’re still in a bear market, where “peak sellers” run the show.
To that end, targeting less-correlated stocks with long positions probably still makes sense. Freeport-McMoran (NYSE: FCX), a top copper stock, is looking to rally after a several-weeklong downtrend. The stock closed above its bearish trend (yellow trendline) last week before also closing above the 10-day moving average.
FCX then posted an odd candlestick last Friday before retracing slightly. Today, FCX soared, moving past its prior trade trigger from last week.
The stochastic indicator has also dipped back below 80. For those reasons, it might make sense to take FCX long at its current price of $29.29, at today’s close, as the general market attempts to build on this afternoon’s gains.
