Are the Central Banks Playing with the Devil?

Following exactly what we anticipated, the Federal Reserve cut rates by ¼%.

Although they see “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective,” they go on to say, “uncertainties about this outlook remain.”

The market was disappointed it did not get a ½% cut.

The bonds or TLTs soared, which pushed yields down almost 5 basis points.

The dollar gained in strength.

More importantly, the Fed’s move today brings into question whether they will cut again as they head into the September meeting on the 18th.

If their goal is to keep up with what the other Central Banks are doing, one can assume the answer is yes.

The last time rates were cut was in 2008. And we all know what happened to the market then.

With today’s cut and anticipation of future cuts, are the banks playing with the devil?

On the guitar it says “El Alma Es Eterna.” That means, the soul is eternal.

With that said, what we have wondered all along, is will the soul of the bullish market remain eternal, but also, have the banks sold the soul of the market to the devil?

In Europe, one can argue, they already have. With negative rates, what tools are left to use to avoid a potentially deeper recession.

And that’s the good news. If the Fed joins the rest of the world in continuing to cut interest rates, we are still looking at a staflation potential.

Currently, with the U.S. dollar strong, that seems less likely.

Yet, I list five factors already in place to suggest that thinking that way is not so crazy.

  1. The banks want to see higher inflation.
  2. Stock buybacks by corporations are out of control. The S&P 500 companies for example, are on track to buy back another $940 billion of stock in 2019. That means that companies are now returning more cash to shareholders than they are generating in free cash flow. This is exactly why we saw a vacuum of no bids on the way down today.
  3. In times of economic turmoil, the mentality can switch from too much raw material supply (deflation) to one of hoarding the raw material supply (inflation).
  4. Although gold and silver sold off today, the recent action proves that there is an investor appetite for metals. It will be interesting if buyers come back in now that both metals are holding support.
  5. Should the dollar begin to falter, I would take that as a sign that many of the undervalued commodities will begin to look attractive.

Bottom line is that August has had some historically huge selloffs. And since the market’s solvency has been mainly due to dovish monetary policy and corporate buybacks, this might be a really good time to check your stock holdings, trim the fat, reduce exposure, and go enjoy some down time.

S&P 500 (SPY) 300.00 pivotal. Under 299.50 some trouble down to 292 where the 50 DMA sits.

Russell 2000 (IWM) As spectacular as the move up was, it was paralleled by an equally spectacular move down today. 155.74 now the immediate support to hold and over 158, perhaps new life.

Dow (DIA) 270.50 now resistance and 264.60 next support or the 50-DMA

Nasdaq (QQQ) 186.50 the 50 DMA support and back above 193.35 better

KRE (Regional Banks) 56.75 next point of resistance with 54.62 key support

SMH (Semiconductors) 116 support with immediate resistance at 119.

IYT (Transportation) 192.45 is the pivotal 10 DMA for tomorrow

IBB (Biotechnology) Confirmed recuperation phase. 105.56 the 50-DMA pivotal.

XRT (Retail) 43.12 is my number to clear.  42.10 key to hold