Home > Uncategorized > 2011/05/18: Tick, Tick, Tick… Minutes Count. And None Quite So Much as Today’s BoE and FOMC Meeting Notes

2011/05/18: Tick, Tick, Tick… Minutes Count. And None Quite So Much as Today’s BoE and FOMC Meeting Notes

As noted previous, the Fed’s ‘extended’ easy money policy meant trends had ‘extended’ as well after the last FOMC ‘no-action’ and very accommodative press conference communication from Mr. Bernanke. First and foremost that meant equities could continue their sustained rise. That included the June S&P 500 future push above key resistance in the 1,334-27 range, which also left and UP Break above the higher end of that range. However, that is all coming into question in a more significant way than any time since the late-April FOMC meeting on the early week slippage back below that area this week. It has shifted the psychology significantly this week: whereas previous the challenge was on the bears to knock the market below it, the burden of proof is now on the bulls to reinstate the upward momentum back above the June S&P 500 future 1,334-27 range.

And it goes without saying that quite a bit of the continuing equities psychology is dependent upon continued dovish sentiment and accommodation from the looser central banks in the UK and US. This is partially a situation unto itself in the current fraught environment, where various problems and programs might weigh upon the equities. Those include everything from the ongoing risks in the peripheral European Debt-Dilemma, a decidedly hawkish stance of the emerging market central banks which are cooling economies to combat inflation (some would say driven by the easy Fed policy), the potential for conservative US politicians to get too aggressive with fiscal retrenchment that might directly hit the US economy (note the current fiscal shortfall in Greece in spite of draconian cuts), the headwinds from a still very elevated energy prices, etc., etc., etc.

Yet, the one other factor which may not be prominent in most market participants’ minds is that this particular phase is so very similar to a previous critical juncture. While the Bank of England minutes released this morning were a bit more dovish than previous due to sustained UK economic weakness, that means the further key rests solidly on the FOMC meeting minutes release this afternoon. That is because it was the less than fully accommodative central bank minutes back in May of 2008 that encouraged the significant failure of the key UP Break at the top of a major rally back at that time. That brought about the end of the early 2008 recovery, and reinvigorated the bear market that became so vicious later that year.

The psychology and economic situation of all the markets is no doubt significantly different than the situation back at that time. However, the technical considerations are significantly similar enough to warrant close attention as the markets evolve later today into the end of this week. Not only are the key technical signals analogous to that phase, but due to the amazing extent of the recovery since early 2009 the price levels are fairly similar as well.

For various reasons the DJIA had the more telling technical pattern back at that time. Interestingly enough, the significant UP Break from April 2008 was at the 12,767 level, which left a natural buffer back down to 12,500. As such, it is of no small interest at this time that the key levels at the top of the February-April range DJIA had pushed out above around the time of the FOMC meeting are 12,450-12,400. However, for reasons reviewed in the Extended Market Implications below, the June S&P 500 future holds the key on this particular phase.

And much like the DJIA back in May 2008 (specifically on the 21st of the month) it will be subject to the influence of this afternoon’s FOMC meeting minutes release. Back then along with less accommodative than expected Bank of England Monetary Policy Committee meeting minutes (which is not the case this time) it was the somewhat unexpected hawkish tone to the FOMC minutes that literally pushed DJIA back below the key 12,767 area in a meaningful way. And that was not just a general sentiment that set in during the course of the day; the market was already down against that specific area in the wake of the BoE minutes in the morning, and immediately cracked the support by significant margin as soon as the tone of the FOMC minutes was understood by market participants.

So, in spite of Mr. Bernanke’s significantly dovish communication at the April 27th post-rate decision press conference, what we see in the actual minutes release this afternoon maybe a bit more critical than most observers suspect. Of course, that will only be if the sentiment is at least a bit more hawkish than expected, especially after the Bank of England minutes this morning were indeed a bit more dovish than expected. However, there are quite a few more Hawks at the Fed than at the Bank of England, even if they tend to get ‘de-taloned’ by Mr. Bernanke’s forceful arguments at the FOMC get-togethers.

Given the intensity of the Hawks’ sentiment in between meetings, it has been rather interesting that (as opposed to the Bank of England decisions) all of the recent Fed ‘no-action’ decisions and ‘extended’ accommodation language has been by unanimous consent. Even if that means the minutes will once again be more dovish than implied by the Hawks rhetoric, it will be interesting to see if there are any cracks in the continued accommodation psychology…

…especially as it relates to adamant opposition to any potential additional Federal Reserve bond market support (which is really de facto equity market and risk asset liquidity) from any near-term initiation of QE3. We shall see.

Extended Market Implications (as of Tuesday’s US Close)

While the DJIA was the more prominent technical indication back in April-May 2008, for various reasons that now rests with the more broadly based S&P 500. Most important among those is that the DJIA has benefited markedly from both the inclusion of the major oil companies which are favored by the energy price run-up, as well as the defensive rotation out of tech stocks into major consumer disposables and financials. As such, the DJIA has been able to maintain its push out above 12,450-12,400 while other equities have failed back below their February-April highs.

The June S&P 500 future is therefore the key arbiter of the overall trend evolution, and it will most certainly be the case that strong sister DJIA will ultimately follow its lead. (This is already in evidence to some degree in the form of the other recent strong sister DAX not being able to maintain the recent rally above its 7,441 February high.) Without going into the sort of detail which we reserve for more extensive technical discussions in the formal Rohr Reports, the June S&P 500 future 1,334-27 area is critical on many levels. Those include the significant upward channel from the major 1,014 June 2009 reaction low, weekly moving averages, critical weekly oscillator indications and whether the current DOWN signal in weekly MACD maintains itself across time. Also now the more balanced ‘fulcrum’ between strong sister DJIA and the recently weaker NASDAQ 100 future (which essentially double top in the 2,400 area), the S&P 500 future is the ultimate key to intermediate-term trend considerations.

Also of note, DJIA 12,450-12,400 has a support buffer to weekly MA-13 in the 12,350 area, which is also likely the arbiter of whether its weekly MACD turns back DOWN in a more meaningful way. That would indicate a failure of the very unconvincing push back into an UP MACD signal over the past couple of weeks. In that regard it would be very similar to its minor new high in October 2007 prior to the major reversal into what ultimately became the Super-Cycle Correction of 2008-2009.

The implications for other asset classes are both straightforward and potentially subtle at the same time. The govvies will undoubtedly maintain their counterpoint to equities now that this has been reinstated (as expected now that earnings season is drawing to a close: see the May 4th Rohr-Blog post “…Equities and govvies were bid together…) Also, June T-note future above key resistance in the 122-00 area is only barely testing its 123-04 down channel resistance so far. That speaks volumes about the T-note’s need for further equities weakness to exhibit the sort of fresh UP Break above that area that will foster tests of higher resistances. Especially important will be whether it can also get through the hefty congestion in the 124-00 area. If so, it is back in an entire higher range that allows for the likely extension of the rally to at least the 126-00 area.

Yet it is more problematic on recent form whether the US dollar will extend its current ‘haven’ bid if the equities continue to weaken. The key is that the US Dollar Index is still having trouble getting out above critical .7580 resistance in the wake of equities slipping to a new recent low on Monday. That said, there is still every reason to suspect the US Dollar Index will indeed be able to extend its ‘haven’ bid above that resistance. However, if it fails along with equities instead of rallying, it would represent a major change in the ‘foundation’ psychology of the foreign exchange market.

After holding supports in the last couple of days on the slippage and subsequent stabilization of the equity market, both Gold and Crude Oil seem content to follow the lead of the equities for now. The caveat there is that any extensive weakness in the equities will likely weigh heavily on the ‘black gold’ while allowing that the actual yellow metal might benefit from the return of a crisis bid if equities get into real trouble.

Thanks for your interest

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