We Are Not Even Thinking About Thinking About Raising Rates

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Key Points

  • Chairman Powell May Have Stopped the Rotation Trade
  • Chaikin Bullish Percent Indicator Moves Lower
  • Copper to Gold Ratio Reaches a Key Inflection Point
  • QQQ Re-Asserts a Leadership Position
  • Trend Across Other Asset Classes Remain in Place

Action Plan

The quote that is the title of this week’s note was made directly by the Chairman of the Federal Reserve in a press conference after a two-day meeting where the Fed decided to leave rates unchanged in the range of zero to 25 basis points. On the surface, that statement should be viewed as bullish for risk assets but the question is, which risk assets? What I heard in that comment was that a V-shaped economic recovery should not be your base case scenario. In a V-shaped recovery, the rotation trade would continue to work. But what does the Fed know when they are completely comfortable telling the world that they do not plan to raise rates at least until the end of 2022? On top of that, they committed to purchasing $80 billion / month of treasuries. It seems that “don’t fight the Fed” can be loosely translated as “Buy Growth Stocks and Treasuries.” At least that is my take on the policy statement.

Interestingly, the equity market has pulled back in the days since the Fed’s meeting. This could partially be due to the increase in COVID-19 cases in many states over the past week along with an increase in Beijing that prompted parts of the city to be shut down. Here in New York, Governor Cuomo noted that the state has received 25,000 complaints of citizens and business not following the guidelines for reopening. This prompted Gov. Cuomo to threaten to ease back on some of the reopening plans.

The pullback has brought the main markets in the US to the first key support level which we are closely watching for signs of stabilization. Last week we highlighted that the next pause or pullback would paint the picture on who is likely to be leadership. That time may be upon us. Thus far, we have seen the ‘growth” area of the market (the Nasdaq) reassert its leadership position as stocks have pulled back.

Commentary

The pullback in the market last week brought the SPDR S&P 500 ETF (SPY) to the fist zone of support that we have been highlighting in the $300 - $310 range. At the same time, the ETF Rating for SPY has shifted to neutral. Should this first zone of support fail to hold, SPY is likely to test the $285 - $295 range. Above this second zone of support, the structure of the uptrend off of the March 23rd lows remains intact and the February highs remain in play. Below $285, investors should begin to think about further declines in equities. Interestingly, the Power Bar Ratio for SPY has tipped back to bearish.

One of the more encouraging signs as the equities market rallied was an increase in the level of participation to the upside (better breadth). While there are a number of ways to look at market breadth, we have recently created one that encompasses our Power Gauge Rating. The percentage of stocks which are holdings of SPY with Bullish or Very Bullish Chaikin Power Gauge Ratings has fallen back below 20% with the recent move lower in the market. This is significant to the rotation trade because our model has valuation as one of the key fundamental inputs. If the rotation from growth to value was truly taking hold, we would expect to see this indicator rebound quickly if key support levels hold.

To see just how close the rotation trade is to an inflection point, we can look across asset classes to the relationship that has kept us bullish on growth for so long. The ratio of copper to gold has rallied back to broken support that was not simply put in place with the 2016 lows, but also the lows that date back to the depths of the global financial crisis in 2008 and 2009 as we can see on this chart that goes back 25 years. Is such an important level likely to give way so easily on the way back up? It is arguably one of the most important charts in the market right now. Should this level of former support (now resistance) hold, the wheels are likely to come off the rotation trade quickly and it will have proven to have been nothing more than a mean reverting rally. As long as the ratio remains below those key lows, the odds support growth continuing to lead value and a continuation of the trends that we have seen for more than two years.

A continuation of the two-year trend would point to further outperformance on the part of the Invesco QQQ Trust (QQQ) which has been the case since the Fed’s meeting and Chairman Powell’s press conference. In addition to reestablishing a leadership role, the fund is within striking distance of reaching new, all-time, highs. Additionally, the fund has a bullish Power Bar Ratio.

The rotation trade that has been playing out in the market over the past month is now at a key inflection point in our view. If Chairman Powell’s comments are interpreted as signaling the likelihood of anemic economic growth over the next two years, we would expect the prevailing trends (growth over value; large over small) to reassert themselves shortly.

Dan Russo, CMT
Chief Market Strategist

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