Why The Fed Stopped Raising Rates, It’s Probably Not What You Think

I hear all this commentary about how bad things must be now that the Fed has made this massive pivot and things are so bad, blah, blah, blah. Stocks have come too far too fast and what does the Fed know. Really? Really?

Was the Fed’s pivot such a surprise? It wasn’t for me. It likely wasn’t to you, since we have talked about this for MONTHS.  I mean you don’t have to be a rocket scientist to see that we live in a world of low rates.  You do realize that Italy has a 10-year Bond yield of 2.48%. That the UK, even with Brexit, has a 10-year yield of 1.07%. Germany has a 10-year at 0.05% 

I have about 265 years of history that would suggest the rates we saw in the 1980s, 1990s, early 2000s, will probably not been seen for another 265 years.  True these are UK rates, but I think it shows my point.

Then there is another point of view on US 10-years.  Get the point?

(MULTPL)

The Fed had no choice but to stop raising rates. We don’t live in a bubble, filled with lollipops, unicorns, and umpa lumpa’s. We live in a global economy that is intertwined. Foreign investors can buy our bonds rather easily, and spreads between US and German bonds were trading at their widest spreads in nearly 30 years, what do you think was going to happen? What would you do? Would you rather own a US Treasury at 2.6% or an Italian Bond at 2.45%? What about a German Bond at 0.05%. It is common sense.  Duh :-P.

Sure the Fed could have kept raising rates, but the structure of the global yield curve would not allow them too. Simply put, the FED can’t raise rates any higher. Draghi ended that notion in early March and in a way dared the Fed to raise rates again. He was probably hoping they would continue to raise rates so that the dollar would soar and the euro would drop like a stone.

I wouldn’t be surprised if Draghi gets even more accommodative in the future meetings. He wants the Euro near parity to the dollar. A cheap euro stokes inflation, and what is Europes most significant problems inflation and growth.

The Fed is on hold until at the very least the ECB and the BOJ are willing to come off their current policies.

Ok, let’s move on…

S&P 500 (SPY)

Believe it or not, the heavy lifting may now be behind us and may be about to get much easier for stocks going forward. We are nearing a zone of resistance now between 2,865 and 2,875, after that we are talking about 2,925 and all-time highs.

The chart below shows that volume levels in this 2,865 to 2,875 are not nearly as thick as where the S&P 500 just emerged. You can on see on the volume by price chart on the right-hand side below.

S&P 500, spx

Russell (IWM)

The Russell hasn’t broken out yet but is on the cusp of a major break out. Should it break out, I think it can rally to 1,710.

S&P 500, spx

Micron (MUWealth Strength IndexMU is Extremely Down and trending Down)

Micron soared today after it reported results, much to my surprise and embarrassment. It is was a story of horrible guidance, with optimism for a better second half of the year. This is not all that different from what we heard from Broadcom a week ago, which I’m happy to hear. Trust me I don’t want to hear gloom and doom. The big hurdle for Micron continues to rest at $45.50. So be cautious until the stock gets above $45.50, should that happen the stock can probably go on to around $54.  The RSI would suggest that the stock does continue to rise.

Micron, <a href=MUWealth Strength IndexMU is Extremely Down and trending Down" width="1188" height="539" />

AMD (AMD)

AMD soared again, rising almost 9% and I think this one still has further to climb too. The chart would suggest $29.50.

AMD

Apple (AAPLWealth Strength IndexAAPL is Moderately Flat and trending Up)

Apple had a huge move today, after the rounds of upgrades this morning. The stock did finally pause at resistance around $195. The next level to watch for is $210, but I’d like to see this stock slow down a bit.

Apple, aapl

Nvidia (NVDAWealth Strength IndexNVDA is Extremely Down and trending Down)

Nvidia did break out today rising above resistance at $178, and now the fill gap is in play up to $198.

Nvidia, nvda

Acadia (ACAD)

Lots of chatter that Biogen is going to going make an acquisition in the central nervous system space. One company mentioned is Acadia.  I don’t see the Bakers letting this one go, they have a firm grip on the company, and many catalysts are coming up in 2019. They had chances in the past to cash out, and they never took them. I doubt it is different this time.  The stock looks like it wants to fill the gap up to around $32.

acadia, acad

Netflix (NFLXWealth Strength IndexNFLX is Moderately Down and trending Down)

Netflix stalled out today around $378, and I think that changes, and the stocks next move is to $405.

netflix, nflx

Enjoy the Ride!  I think it about to get even better.

-Mike

This article first appeared on Mott Capital.

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