Is this Market a Trick or a Treat?
With children running around the neighborhoods trick-or-treating this past weekend, it is fitting that we look at the market through the lens of a sugar induced child. The question is, did the market eat too much candy and now it is going to crash? Or is this just a fun night of dressing up, eating candy and all will be okay.
Let’s take a look at what the data tells us…
Trick or Treat #1 — The Federal Reserve on Wednesday indicated that it will consider the possibility of raising interest rates during its December meeting. As a result, the CME Group’s FedWatch report provides an implied 49.6% probability that the Fed raises rates in December. This is up from 29% probability just a few days prior.
This announcement by the Fed was perceived as favorable for the equity markets as the Dow Jones Industrial Average (DJIA) shot up nearly +200 points by the close. From our perspective, the first interest rate increase is not a concern because history tells us the first rate increase indicates at least two more years of economic growth. The interest rate hike we fear is the final increase. This is because it likely signals the economy is nearing recession.
Conclusion: We would lean toward a “Treat” as it signals the Federal Reserve feels more confident in the economy to be able to raise rates.
Trick or Treat #2 — During the month of October, the materials and energy sectors lead a strong rally off of the August and September lows. From our perspective, there is no way these two sectors can continue to lead the charge. The October rally turned the market on its head. Those sectors that were leading the market lagged, and the most beaten down sectors took the lead.
Conclusion: This has to be a “Trick”. With the price of oil and the amount of debt many energy and material companies are carrying, it just does not seem sustainable.
Trick or Treat #3 — From a technical standpoint, this is where the market is providing a mixture of tricks and treats. On the weak side of things, our breadth indicators and secondary indexes have not experienced the same level of rebound as the “blue chip” indexes have. This could be a sign that additional weakness could occur in the market. With this said, the rally in October was robust. It has caused our short and intermediate term indicators to move back to bullish. As of right now (Nov. 2), only the longer-term indicator remains bearish.
Conclusion: We see that the homeowner’s light is still on, but there is a witch peering out the window at us, and we cannot tell if she is planning to give us a trick or a treat. Either way, we need to climb the front steps and ring the doorbell just to find out. It’s probably a treat, but until we ring the doorbell we just don’t know for sure.
The market has done nothing but go up since the rally off of the September low. However, it does appear the market could be setting up for a correction based on recent price behavior. At this point, we would estimate that an additional pullback will not be extreme and that new market highs could be just a few weeks (or maybe a month) away.