Bad news was good news on Wednesday as minutes from last month’s Fed meeting gave traders reason to expect a slower liftoff on rate hikes in light of global growth concerns and a strengthening dollar.
Stocks recovered their losses from the day before when the IMF cut global growth forecasts and made a series of cautious remarks, which, ironically, included persistent lower rates.
For the last couple of weeks, technicians on our show have been warning of a deeper correction than what we’ve experienced so far this year, citing the 200-day moving average on the S&P 500 as the first downside target to watch.
John Kosar (Sep. 27): “The next level on the S&P 500 to really keep an eye on is down around 1900, which happens to be the 200-day also. That chart is very similar to the Dow...but basically it's 1902 to 1896. You've got several important old highs going back three to six months. And you've got the 200-day. So, I think that's the next formidable level on the downside and I think there's a good chance that we're going to at least get down there.”
Going back to the beginning of the bull market since 2009, there are only two occasions when the S&P 500 broke major support and traded below its 200-day moving average for an extended period. The first time took place after the Fed ended QE1 and the second time after the Fed ended QE2. The market traded lower by more than 15% on both occasions, but avoided a 20%+ bear market.
With the end of QE3 expected to take place this month, questions remain as to how far the market may correct. Will history repeat with another 15-20% correction, but remain short of a bear market? This seems to be the consensus view. Bears cite high valuations, leverage, and weakening global growth for reasons to think otherwise. Bulls see a steadily improving U.S. economy, low inflation, and easing by central banks overseas. At this point, it seems like a tug-of-war between the U.S. and the rest of the world, with money sloshing towards the dollar.
Q3 earnings will be in focus this month. According to Sheraz Mian at Zacks, this reporting season will be very important for understanding the true direction of the economy and market given the weather-induced distortions in Q1 and subsequent bounce-back in Q2. As far as corporate profits go, Sheraz believes the best is likely behind us with growth expectations for Q4 and beyond too optimistic. Subscribers can listen to his recent interview here.
Related:
The Trillion Dollar Question: What Happens When Quantitative Easing Ends?
