Fed Action Increases Potential for August ’19 Plunge; Aug. ’19 Could Mimic Aug. 2015 as Stocks Enter Danger Period! China Stocks Leading Way.
07/31/19 Weekly Re-Lay Alert – Midcycle Adjustment (One-Off??) – “Leading into today’s Fed announcement, technicals were telegraphing the likely outcome. In contrast, economists and Fed watchers had a slightly different (and more extreme) expectation…
The Fed watchers have been repeatedly calling for 2 – 3 rate cuts in 2019 (which is still a possibility). The technicals said otherwise. As recently as early-July, some Fed comments were interpreted to favor a .50 basis point cut. The technicals said otherwise.
In contrast, cycles and technicals were projecting:
— A reversal lower in stocks on July 29…
As a result, the Fed gave the absolute minimum (.25 point cut and ‘midcycle adjustment’ quote). Let’s step back and view the forest for a moment, since the swaying trees can sometimes be deceptive…
The stock market has rallied throughout 2019, encouraged by the expectations of lower interest rates. Immediately prior to that, in late-Dec. ‘18, equities completed a ~3-month nosedive – culminating on a fourth interest rate hike AND the perception that 2 – 3 more rate hikes were coming in 2019.
Guess what?
The Fed watchers and economists were dead wrong in late-2018/early-2019. As usual, they just simply extrapolated forward – on a linear basis – what had already been transpiring (more rate hikes). That is the simplest (and sometimes laziest) way to do it.
Instead, stock market action, related technical analysis, and a powerful convergence of cycles in late-2018 (including a 3.25-Year Cycle) were signaling the end of a sharp sell-off and the likelihood for a multi-month rally to follow… something very unlikely if one or two more rate hikes materialized in the first half of 2019.
It took a little while for that perception to shift – first to ‘no more rate hikes in 2019’ to ‘perhaps a rate cut in 2019’ to ‘2 – 3 rate cuts in 2019’.
But, just as in late-2018, the linear extrapolation of this current move (i.e. If they cut rates now, they will cut again in 2 – 3 months and then cut again in 2 – 3 months after that, etc.) could be dead wrong.
If it isn’t, there is again a dilemma for equities…
If the consensus is wrong, and no more rate cuts are in the foreseeable future, that could remove one of the primary supports that have kept stocks rising in recent months. That would usher in a textbook ‘sell the news’ reaction in equity markets… in perfect sync with cycles.
If the consensus is right, that could be a more serious concern for stocks.
The economy would have to get much worse to justify another cut in the near future. And that would not be great news for the stock market. So, stocks might be between a rock and a hard place…
Either the economy (and earnings) gets worse and ultimately drags stock prices lower OR (1) the economy does not justify that mentality, (2) further rate cuts are squashed, and (3) stocks sell off – perhaps on the backs of bonds selling off – as a result of the pendulum swinging back to a neutral stance.
There are other key factors, triggered by today’s action, that warrant closer scrutiny…
Stock Indices reversed lower on today’s Fed news, validating multiple expectations. The first, that is elaborated in the impending August ’19 INSIIDE Track, involves the monthly trends.
Today’s reversal was enough to prevent the DJIA, the NQU, the DJTA, the Russell 2000, and the NYA from turning their monthly trends up. That increases the likelihood that a 1 – 2 month (or longer) peak is unfolding and that August ’19 will see a sharp sell-off.
On a weekly basis, today’s action is increasing the likelihood that the S+P 500 will drop to (at least) 2920/ESU and fulfill multiple weekly HLS targets.
For the past three weeks, the weekly HLS levels have been at 2920, 2920 & 2921/ESU, respectively. That synergy, combined with daily trend patterns in the DJIA, NYA and related indexes, projected a new 3 – 5 day sell-off to take hold this week.
Peaks were set on Friday (July 26) & Monday (July 29) and the 3 – 5 day sell-off began. One of the downside objectives for this initial decline is 2920/ESU.
On a daily basis, this sell-off fulfilled the daily trend pattern in the NYA AND turned the daily trend down in the DJIA. As stated last week:
Its daily trend eventually zeroed in on July 26/29 as the most likely time for a daily peak.”
These dueling daily trend patterns pinpointed the days surrounding July 26 as the most likely for a peak and reversal lower. The primary indexes rallied into July 24 – 26 and fulfilled their daily trend patterns while the NYA rallied into July 26 and signaled that another sell-off was imminent. Both signaled a top, but from different perspectives. So, what now?
This is again where dueling patterns narrow in on a specific timing objective [reserved for subscribers]…
Equities continue to provide basic parallels to 2015 (and to 1979, in sync with the 40-Year Cycle), during which several key stocks and indices peaked in May ’15 (as some did in May ’19) to start the topping process.
That was followed by a sequence of highs set in other stocks and indexes, during the months that followed. The strongest markets waited until late-July/early-Aug. ’15 before setting final peaks. They then suffered a sharp sell-off in August, bottoming in late-Aug. ’15.
The same is (so far) true in May – Aug. ’19. It began with the DJTA peaking in late-April and then the Russell 2000 peaking in early-May. Bellwether stocks like AAPL & NFLX also peaked in early-May. The Shanghai Composite also peaked in April ’19 (in 2015, a collapse in Chinese stocks led the sell-off).
With today’s sell-off, the late-July peaks – in many of the other indexes – have a better chance of holding. And that increases the potential for an August ’19 sell-off. This action is also validating corresponding analysis – discussed in the past two weeks – linked to 2-year, monthly & weekly cycles as well.
These cycles project a multi-month low in late-Aug. (possibly stretching into Sept. ’19 in some indexes) with the majority of selling likely in the weeks immediately preceding that cycle low (similar to Dec. ’18 and closely related to the sell-off of Aug. 2015).”
NYSE projects July 29 – Aug. 2/5 sell-off and likely start of projected August plunge in stocks. DJ Industrials reinforce projected sell-off from mid-July into Aug. 19 – 30 (daily cycles should hone this to more specific dates). 40-Year Cycle & 4-Year Cycle project increasing trouble in/around Aug. ‘19… with a Aug. ’15-style sell-off becoming increasingly more likely! Why could August ’19 look like Aug. 15?
Refer to latest Weekly Re-Lay & INSIIDE Track publications for additional details and/or related trading strategies.