MrTopStep's End of the Month View

MrTopStep's End of the Month View

Yesterday’s market reaction to Fed Chair Jerome Powell’s statements could be the beginning of optimism returning to the markets, but a lot depends on how December opens.

MrTopStep's End of the Month View
MrTopStep's End of the Month View Getty Images

The U.S. stock markets opened higher yesterday, then retraced some of that move in the morning and slowed down midday prior to Fed Chair Powell’s noon statements from New York.  However, at the time Powell began to speak, a strong wave of buying came into U.S. equities and persisted through the end of the day, as highlighted on the chart below.

From Powell's comments, it appears that the Fed is now taking a more dovish tone, suggesting a less aggressive approach to raising interest rates. In portions of his statement, Powell used the past tense with regard to rising interest rates, which some analysts view as contributing to that dovish tone. This announcement was also quite a contrast to his statement from early October.

Immediately following the statement, as they were digesting Powell’s comments, many institutional bank research divisions began to put out notes. While some lesser-known banks thought Powell might not be as dovish as he sounded, most of the major banks seemed to interpret the statements in a similar way - that after the expected December rate hike coming up next month, the Fed could take a pause in raising rates heading into next year.

Since Powell became Chair in February of this year, FOMC days have been very bearish for U.S. equities, resulting in what has been called the “Powell put.” However, given the tone of yesterday's announcement and the fact that Powell’s statements caused a strong equity rally, FOMC announcements may represent one less uncertainty for the U.S. stock market going forward.  This is music to the ears of bulls.

As we mentioned last week, we are carefully watching December’s open in U.S. stocks. So far, in this final week of November, the stock markets are rallying, but today begins the T+2 into the end of the month and we expect some selling going into this month's close.

This week, the S&P 500 made its way back into positive territory for the year along with the DJIA and Nasdaq, leaving only the small-cap Russell 2000 and the S&P MidCap 400 in the red for the year.

The technical pattern in the S&P 500 that we identified in yesterday’s article and a possible fundamental change in Fed rhetoric both add a little bit of life into U.S. stocks going into the end of the year.

Let’s face it; money managers want to see stocks go up to keep clients engaged and happy in the markets, so that is generally the path of less resistance that leads to year-end bonuses.

However, we reiterate that should stocks fall back below the 2017 close at the time of the December open, we expect significant liquidation heading into the end of the year. Stay tuned for December.

 

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