I turned the TV on just after 10 am yesterday to watch Fed Chair Powell’s annual appearance before the Senate yesterday.
It was a shameless display of self-serving Senators grandstanding to reinforce the entrenched beliefs of the various constituents that voted them into their lavish positions, expertly executed so that in the next election cycle they can point back to that moment and say “See how I grilled the Fed Chairman for you? See how I’m fighting for you everyday Americans? Vote for me.”
I lasted about 20 minutes before I had to turn the TV off…
I guess it should go without saying that if you start with a room full of politicians and an economist, you’re not going to get much in the way of real world experience on how the business cycle actually works. But this group really had their heads up…um… in the clouds.
I guess I shouldn’t get so worked up about it. Some of it’s actually pretty funny. Like Elizabeth Warren accusing Fed Chair Powell of using interest rates to get people fired and raise the employment rate, like he’s a 5-year old that just stole a cookie…
Of course higher interest rates are intended to get people fired. That’s the only strategy the Fed has to reduce the demand that pushes prices higher. Maybe Senator Warren could help out and get every American to sign a pledge to stop buying groceries and gasoline…
Or, maybe just get a grip on how the business cycle works. It is inevitable that when business is booming, companies hire like crazy. And when business ebbs, they start laying people off. This dynamic is obvious with tech companies that depend on advertising for revenue, like Meta, Google, Twitter…
A Global Problem
Look, inflation is a global problem. Every country on earth has seen prices surge higher. But predictably, the good Senators happily ignore the impact China’s zero-COVID policy had on supply chains,and how the Russian invasion of Ukraine devastated grain supply and re-drew energy supply channels. That macro-stuff, it doesn’t fit the narrative….
The Democrats agree it’s the Republicans fault. The Republicans agree that it’s the Democrats fault. And everyone agrees it’s the Fed’s fault. At least they got that last part right…
Fed Chair Powell has made an absolute mess of this whole inflation thing. He left emergency stimulus in place long after the emergency was over. He ignored the Fed’s mandate to raise interest rates when inflation moved over the 2% level in March 2021. He continued monthly QE bond purchases until the inflation rate hit 8.5% in March 2022. And then, after ignoring inflation for a full year, Powell’s first action was a 0.25% rate hike.
It still boggles my mind that a Fed chair could respond to 8.5% inflation with a measly quarter point hike. That’s like taking on an F-16 with a peashooter.
Anyway, there are two big takeaways from Powell’s Senate testimony. One, he’s inept and really doesn’t know what he’s doing. And two, interest rates very likely headed to the 5.5%-6% range.
What’s it all Mean
Right now, interest rates sit in the 4.25%-4.5% range. Before powell started talking yesterday, the market was expecting the Fed to stop hiking once rates got to the 5%-5.5% range. Now, the goalposts have been moved to the 5.5%-6% range.
Now, I could make some grand pronouncements about what the new interest rate target means for the stock market. Or I could let the market speak for itself. And I’d much rather go right to the source – which means, that’s right, my updated chart for the S&P 500…
Source: Yahoo Finance
Back on February 22, we were looking for the S&P 500 to move down to the confluence of the 200-day moving average (black line) and the rising trendline (rising blue line) at 3,940.
The S&P 500 has found support at 3,940 three times since then, as shown by the three little arrows on the chart.
The glyph at the far right of the chart represents today’s action. For all the handwringing about the new interest rate target of 5.5%-6%, the S&P 500 is still finding support at the rising trendline (rising blue line).
Yes, we’ve seen some selling this week. But the technical picture for the S&P 500 hasn’t changed – there’s been no new lows and no breach of trendline or support. Pretty impressive really, and to me this says that the so-called “news” about higher interest rates isn’t really news at all.
Of course that could change, and support at 3,940 is the canary in the coalmine. A break below that support level will almost certainly lead to a move below 3,900.
BUT – the 50-day moving average (purple line) at 3,997 is far more interesting. The S&P 500 tried to move above the 50-day MA today but failed. I think it’s just a matter of a couple days before the S&P 500 rallies above 4,000.
And if you want to trade that move, go with the C3.ai (NASDAQ: AI) call options at the $28 strike price that expire next Friday, March 17. They are currently trading $0.60/$0.65.
That’s it for me today, take care and I’ll talk to you on Friday.
Chief Investment Strategist
Pro Trader Today