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Wednesday, December 2, 2015

Daily update 12/2 Rate hike scenarios

Splat.  Did I mention the break out yesterday did not look right?  Guess it wasn't.

About face.  Breadth was -75%.  This is why I do not like late day breaks out of key resistance areas.  They are prone to failure.  New highs dropped way down to 66.  New lows spiked up to 118.  Volume increased from yesterday almost 20%.   That was a very strong rejection of yesterday's break out.  There is no other way to describe it.

The futures are back below the 20 SMA, but we do not have confirmation of a break yet.  The main take away from this chart is that resistance was not conquered yesterday.  It remains to be seen if the dip buyers have been scared away or not.

The green count dropped precipitously and now we have a negative crossover.  The bears could be back in control, but they need to see follow through.

Reversal days like this mean more when they come on a retest.  SPX is retesting its early Nov. high and so far it is not going well.  This rally is on the ropes now.  If the bears show up again tomorrow it will likely be over.  SPX stopped right on its 20 DMA.  The dip buyers may come out to play.  That often happens after a stiff reversal day from a new rally high.  If that bounce fails then the sellers usually come out of the woodwork.  One thing that is abundantly clear now is that this resistance is very stiff.  It might not be conquered anytime soon.

I think we have all seen or heard that we have nothing to fear from a rate hike.  The only other time the FED raised rates from near 0 was during the great depression.  Here is an article on that instance.  This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession  Lousy tittle (the U.S. was not in recession), but informative article.

It was not the first rate hike that killed stocks.  However, the economy was growing over 10% a year when they raised rates.  This recovery is only doing 2%.  Nowhere near the same situation.

A reader (thanks) sent me this chart.  It shows what happened the last time the FED raised rates when the ISM manufacturing number was below 50.  It hit 48.6 at the most recent reading.  Here is a look at SPX.

While there was a bit of downside in SPX it was short lived.  This happened two years after the previous recession ended.  GDP was over 7% in 1984 and was 4.2% in 1985.  There was no recession until 1990.  This also does not compare to our situation.

We have a global recession going on already.  Inflation and growth are very weak.  How many times have we heard this is the weakest recovery ever from a recession.  Near as I can tell the only reason the FED wants to raise rates is so they have room to lower again when we go into recession.  So while there may be no reason to fear a rate hike based on past history there is no historical comparison for this FED rate hike.   My guess is we will see a massive rally that day as all FED actions (even just talking) seem to cause a buying panic these days.  However, I suspect the rally will be short lived.  That would be even more likely if the dollar is heading north.


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