The next Fed meeting takes place in the opening days of November. At that point in time, the Fed may divulge a more specific tapering schedule in reducing QE bond purchase. We have witnessed the SPX rally into key meeting over the past 2 years and this time may be no different. But there remains an equal probability that markets continue lower into that Fed meeting. Our system does not deal in absolutes but rather degrees of probability, and at this time, we place a slight bias on an upwards trajectory into the Fed meeting. However, one of our system’s key indicators will produce its reading by mid-week, and may abruptly reposition our stance as we may enter short and volatility trades. Major headline risk relating to China’s debt problems with Evergrande may be the negative catalyst that ignites downside contagion. Remember that the Evergrande problem is 10x the size of the Lehman event in 2008 that caused a recession across the globe. We accurately forecasted a three week period of whipsaw for our Gold Members without much traction in either direction from late September into mid-October, and we expect this to continue to take place. We anticipate a sharp move in markets after this period concludes breaking out of existing trading ranges.
The main catalyst for our whipsaw forecast has been the debt ceiling issue and risk of potential US debt default this past week. Events settled down somewhat toward the end of the week.
The week’s economic releases were slightly bullish, despite a few negative surprises, with forward-looking reports suggested a pickup in economic activity. The ISM services PMI, the ADP payrolls number, and the weekly jobless claims reports were the most positive for investors even as the better-than-expected reports applied pressure to the Fed to start its tightening cycle. The mixed government jobs report was not enough to stop the rally in Treasury yields, and the divergence between the U.S. economy and the rest of the world pushed the dollar to new highs against other major currencies.
While the short-term technical picture improved thanks to the failed breakdowns in the Nasdaq and the S&P 500, there is still plenty of room for improvements with the tech sector still wounded due to the deep correction. The S&P 500, the Dow, and the Nasdaq are each stuck below their 50-day moving averages, but the benchmarks are still well clear of their 200-day moving averages. Small-caps had a mixed week, but despite showing signs of weakness, the Russell 2000 finished the week above both its moving averages on Friday. The Volatility Index (VIX) continued to show a bullish divergence compared to the price action in the major indices, and the fear gauge closed the week back below its 50 and 200-day moving averages, as well as below the key 20 level.
JP Morgan, like most major banks, remains unsure of major indexes’ direction into the upcoming Fed meeting. In a private note to its largest institutional investors, JP Morgan gave guidance to remain short major indexes into November while its top equity analyst issued the exact opposite forecast of new highs into year end. The answer to whether the market has ended its correction is likely to come in the next 7 days.
Investors are in for another big week of economic releases, with crucial inflation measures and indicators from the consumer and manufacturing sectors on tap. The JOLTS openings estimate will be out on Tuesday, the Consumer Price Index (CPI) and the FOMC meeting minutes are scheduled for Wednesday, the Producer Price Index (PPI) will highlight Thursday’s session, and the week will conclude with retail sales and the Michigan consumer sentiment number. With Treasury yields trading in a strong uptrend and short-term technicals still remaining shaky, stocks are expected to remain highly volatile throughout the week.
Our altcoin crypto coverage began this week with specific coins being highlighted with potential for major rallies. We currently forecast an explosive period for altcoins into year end. Recently, one coin we have tracked but not yet covered underwent an explosive move from $.01 to $.50 over a period of days. This week we will give members one path to purchase these coins. We are not financial advisors and there are many ways to purchase these high risk altcoins, and we encourage members to perform their own due diligence and research.