The equity market was pretty confused by the Fed, spiking higher at first, then falling, then rising, then falling through the press conference. The Fed, I think, tried hard to subtly set expectations about the economy in their projections, noting that a recovery back to 2019 levels would not come until the end of 2022. Currently, they see the GDP contracting by 6.5% in 2020 and expanding by 5% next year, and an additional 3.5% in 2022. The Fed is also protecting keeping rates at 0% until 2022. So the Fed is sending a message that there will not be a sharp snapback recovery.
The Fed was also very sneaky because they buried in a press release from the NY Fed that QE Treasury purchases would be at a pace of approximately $80 billion a month, an MBS purchase of about $40 billion a month. The days of expanding the balance sheet by a few hundred billion a week are over. I say it was sneaky because I did not hear these numbers come up once yesterday outside of that one press release.
Total Assets Chart
The bond market seemed to get the message loud and clear, with 10-year yields falling from around 78 bps to 73 bps.
US Govt Bonds 10 Yr Yield Chart
So will the market continue just keep going higher, impossible to know? Based on this outlook, it shouldn’t. Base on the slower pace of balance sheet expansion, it shouldn’t either. The big test for the S&P 500 won’t come until the index falls below 3,180. Then a whole bunch of stuff could go wrong, based on options positions and options expiration next week. I talk about more in the midday write-up, it is too complex to get into here. But a drop below 3,180 opens the door to 3,115 and potentially lower.
S&P 500 Index Chart
Meanwhile, the QQQs tried to melt higher yesterday, by breaking out to the upside in the rising wedge, but could not. I think it is late in the game to try for a successful break out for the Qs. The ETF has an RSI of 75. I saw some bearish betting in the QQQ too.
QQQ Daily Chart
Starbucks (NASDAQ:SBUX) warned today, and I think that this will be the first of many more to come. This is the message I have been trying to send. If companies pull guidance and have no visibility, then investors do not either. The stock fell 4% today and now finds itself resting on resistance at $78.50, a break of that price send its too $72.25.
Starbucks Corp Daily Chart
Wells Fargo (NYSE:WFC) fell by 9% yesterday after the company noted net interest income would be down 11% this year. Not good. Anyway, the stock has now failed twice at $33.25, a potential double top. The next stop could be back to $26.
WFC Daily Chart
Nikola (NASDAQ:NKLA) has seen a lot of action lately, and its valuation is crazy, add that to its insanely high borrow rate of about 350%, and it seems like shares are likely to fall further. Forgot to mention the bearish betting in the options. I think $57 is a good first stop.
DAX Index Chart
Tesla (NASDAQ:TSLA) went over $1000 yesterday for the first time. I’ll have to think about what is next, but after holding this stock since the summer of 2014, it feels good to see the stock finally get to that level, and work out the way I envisioned it would.
Tesla Daily Chart