This post is just a minor possibility of what may happen. Please read the chart for technical information. The daily RSI (momentum) is on a decline with bearish convergence relative to price action.
On Wednesday, October 14th, 1987 to Friday, October 16th, 1987 (three consecutive days), the S&P 500 declined by about 10%. Monday, October 19th, 1987 came and the market sold off with SPX closing down 20% for the day. All of this occurred after a sizable rally.
Recently, SPX closed down about 3% from all-time highs with three consecutive down days. This is not as severe compared to the three consecutive days in 1987 as discussed above. Again, this occurred after a sizable rally (about 10% since 06/03/2019 lows). So it's possible we could see at least another 3% drop from here on 08/05/2019 or some time this week. What's different this time from a macro perspective? We got a rate cut by 0.25% and renewed global trade fears. In particular, between USA and China. The Fed said the 0.25% cut is a "policy adjustment" and it is "not the start of a long series of cuts". There is a problem here with that statement. As soon as the 0.25% cut occurred, the market immediately started pricing in another one or two cuts of 0.25% each (look at the TNX ticker, 10-year yields). This should raise red flags about the bull narrative.
Here are some of my theories of what may happen later in 2019 and beyond:
1. If the Fed does not cut rates by September's meeting (with conference and economic projections), the market is very likely to continue selling aggressively.
2. If the Fed cuts rates by 0.5% by September's meeting (with conference and economic projections), the market might continue selling, but with low aggression. We may even see a rally due to the perception of having a sustained economic expansion with low inflation .
3. If the Fed cuts rates by 0.25% by September's meeting (with conference and economic projections), the market might continue selling, but with medium aggression (between scenarios 1 and 2).
4. If the Fed hikes rates by 0.25% by September's meeting (with conference and economic projections), we would likely see entire portfolios liquidated and funds exiting the market at mass scale. I don't expect this scenario to happen, but anything is possible.
5. If the Fed decides to continue holding rates beyond September, then market participants will lose faith in the Fed's monetary policies and continue to sell off their positions.
I think the market is starting to lose trust in the Fed's decision making abilities and starting to question their independence from political affairs. The market was expecting a cut and it got one on 07/31/2019. Why did the market still sell off on the initial reaction? A possible answer is that the cut wasn't large enough. Many expected 0.5%, but got only 0.25%. So they sold off their positions. The timing of the cut was a bit unusual because it didn't occur on a FOMC-with-conference-and-economic-projections day. The rate adjustment seemed to have occurred outside of the Fed's usual cycle, which is to make any necessary cuts/hikes on a quarterly basis only (March, June, September, or December). This too should throw red flags since the Fed's behaviour on 07/31/2019 was inconsistent relative to the past decade.
If you observe the ( TNX - FEDRATE) mathematical expression on a chart, it's in the negative territory. It's at -0.39% if you consider the FEDRATE to be adjusted to 2.25% (over night lending rate), effective immediately. Typically, when the expression is negative it didn't take very long for the market to enter bearish territory. It's a signal to keep an eye on.
On Wednesday, October 14th, 1987 to Friday, October 16th, 1987 (three consecutive days), the S&P 500 declined by about 10%. Monday, October 19th, 1987 came and the market sold off with SPX closing down 20% for the day. All of this occurred after a sizable rally.
Recently, SPX closed down about 3% from all-time highs with three consecutive down days. This is not as severe compared to the three consecutive days in 1987 as discussed above. Again, this occurred after a sizable rally (about 10% since 06/03/2019 lows). So it's possible we could see at least another 3% drop from here on 08/05/2019 or some time this week. What's different this time from a macro perspective? We got a rate cut by 0.25% and renewed global trade fears. In particular, between USA and China. The Fed said the 0.25% cut is a "policy adjustment" and it is "not the start of a long series of cuts". There is a problem here with that statement. As soon as the 0.25% cut occurred, the market immediately started pricing in another one or two cuts of 0.25% each (look at the TNX ticker, 10-year yields). This should raise red flags about the bull narrative.
Here are some of my theories of what may happen later in 2019 and beyond:
1. If the Fed does not cut rates by September's meeting (with conference and economic projections), the market is very likely to continue selling aggressively.
2. If the Fed cuts rates by 0.5% by September's meeting (with conference and economic projections), the market might continue selling, but with low aggression. We may even see a rally due to the perception of having a sustained economic expansion with low inflation .
3. If the Fed cuts rates by 0.25% by September's meeting (with conference and economic projections), the market might continue selling, but with medium aggression (between scenarios 1 and 2).
4. If the Fed hikes rates by 0.25% by September's meeting (with conference and economic projections), we would likely see entire portfolios liquidated and funds exiting the market at mass scale. I don't expect this scenario to happen, but anything is possible.
5. If the Fed decides to continue holding rates beyond September, then market participants will lose faith in the Fed's monetary policies and continue to sell off their positions.
I think the market is starting to lose trust in the Fed's decision making abilities and starting to question their independence from political affairs. The market was expecting a cut and it got one on 07/31/2019. Why did the market still sell off on the initial reaction? A possible answer is that the cut wasn't large enough. Many expected 0.5%, but got only 0.25%. So they sold off their positions. The timing of the cut was a bit unusual because it didn't occur on a FOMC-with-conference-and-economic-projections day. The rate adjustment seemed to have occurred outside of the Fed's usual cycle, which is to make any necessary cuts/hikes on a quarterly basis only (March, June, September, or December). This too should throw red flags since the Fed's behaviour on 07/31/2019 was inconsistent relative to the past decade.
If you observe the ( TNX - FEDRATE) mathematical expression on a chart, it's in the negative territory. It's at -0.39% if you consider the FEDRATE to be adjusted to 2.25% (over night lending rate), effective immediately. Typically, when the expression is negative it didn't take very long for the market to enter bearish territory. It's a signal to keep an eye on.