The Fed Fail
It appears that the Fed did not give the market exactly what it was looking for. Sure, rates will remain low for years, the Fed has “QE infinity” in play, but the Federal Reserve could have been more dovish, in my view. After all, other major central banks are using or are “contemplating using” negative rates and are buying “unconventional assets”.
So, why not the Fed?
Low rates and endless debt purchasing may not be enough to hold up markets in a faltering economy full of fundamental problems. A possible second wave of the coronavirus, a slower-than-expected economic recovery, abnormally high unemployment, a possible change in consumer spending habits, uncertainty about the upcoming Presidential election, and other detrimental elements could cause stocks and other major asset classes to move notably lower in the short to intermediate term.
Let Us Look at Some Major Indexes
S&P 500/SPX (SP500)
We see the SPX gap lower this morning (down by over 1%), which is now below its 50-day moving average for the first time since April. SPX remains above critical support, 3,300 for now. However, if this level breaks down, SPX will likely fall to 3,200 next, and possibly back down to 3,000 support after that. To the upside, we want to see SPX get above 3,450 before considering a return to a positive momentum environment capable of reaching new highs.
The Nasdaq: Not looking much better
The Nasdaq retested its prior low at around 10,750 and now appears to be making a decent comeback, down by roughly 1.25% on the session. However, we also see some red flags here like the clear breakdown below the Nasdaq’s 50-day moving average, no sign of panic selling or capitulation of any sort, etc.
Nasdaq futures tell an interesting tale
Source: Think or Swim, Ameritrade
Nasdaq futures made a new low this morning below the key 11K support level. Now, this is the third time in several sessions that the Nasdaq has returned down to this level, and it is dangerously close to breaking down. If 10,900 support crumbles, Nasdaq futures are likely to decline to around 10K, in my view. This would bring the Nasdaq’s total correction down to just about exactly 20%, and this is where we may be headed next.
Gold: Still the Bright Spot?
Gold is not reacting much to the Fed, although I think it should be going higher, given the perpetual monetary expansion around the globe and the Fed’s suggestion at higher inflation targets. Nevertheless, here we are, still trading around the crucial $1,950 level.
To the upside, key resistance remains $1,980, while crucial support to the downside is $1,920. Gold futures have been stuck in this trading range for a while now, but once the market digests the FOMC’s news and all the factors surrounding the economy, gold is likely to resume its ascent higher, in my view. We remain committed to our 1-2 year $2,500-$3,000 price target range for gold.
Silver is in a similar position, recently bouncing off key support at $26.50. However, silver may be in a vulnerable place technically in the short term. If the $26.50 level gives out in the near term, we could retest $24 lows next.
To the upside, key resistance is at $27.75-$28.00, then $30, and then new highs. Intermediate and longer term, we remain constructive on silver due to very similar factors as gold (perpetual fiat printing, prospects for higher inflation, enormous debt loads, etc.).
It is interesting that Bitcoin’s correction preceded the stock market’s decline, and the digital asset has corrected by 20% peak to trough already. In fact, since the drop, BTC made a strong base around $10K and traded up to over $11,000 in recent sessions.
Some key levels to watch from here are $10,750 as well as $10,500. If the $10.5K breaks down, some panic may start to set in to the market, and if $10K support doesn’t hold, BTC could drop notably to around the $9K level next.
Still, BTC and the cryptocurrency complex remain in a long-term bull market cycle, in my view. Therefore, any substantial downside, or even a retest of $10K, is likely a good area to add or initiate positions.
The Bottom Line
We are getting a bit more cautious on markets in general going into October, November months. There is uncertainty about the outcome of the upcoming presidential election, a possible second wave of COVID-19, the likelihood of slower growth and possible worsening economic indicators, as well as lower corporate revenues/profits, and other detrimental factors to look forward to in future months.
The bottom line is that the Fed likely did not do enough to inject the confidence that markets needed to move higher from here. Policy essentially remained unchanged as expected, but it felt like the Fed could have provided a more dovish tone in their assessment. Chair Powell did not speak much about letting inflation go above 2% for a prolonged period of time, even though it likely will, in my view. Furthermore, the Fed could have adopted a more ECB, BOJ type of stance where they could have hinted at supporting markets with more unconventional measures such as negative rates and wider asset purchases. Therefore, stocks could continue their slide from here. In our base case scenario, I’m looking for support at SPX 3,000, and Nasdaq (futures) 10,000, 16% and 20% declines from recent ATHs, respectively.
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Disclosure: I am/we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.