Doves Attack

Doves are harmless, right? Suppressing interest rates and pumping markets full of cash for 10 years straight has obviously done wonders for stocks. What could go wrong?

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Nothing, unless you consider the markets’ addiction to easy money a problem. The mere hint of the Fed normalizing rates and “allowing” a business cycle to play out has the doves massing for an attack straight out of a Hitchcock movie.

Opinions are all over the map regarding tomorrow’s Fed decision. I suspect the committee members, themselves, are somewhat bewildered. The US has taken on way too much debt and can’t afford higher interest rates. Yet, until recently, inflation dictated that they tighten.

Will inflation’s recent decline stick, or will it bounce back toward 3% the moment Trump takes his boot off Saudi Arabia’s neck? And, what about those sectors of the economy which have relied on low interest rates to do as well as they have? Will the Fed knowingly nudge autos, housing and financials into a recession?

To hear our Dove-in-Chief tell it, more rate hikes will unravel all the wonderful things his economic policies have accomplished. Can the Fed afford to appear subservient to the president, even if they did agree with him?

The charts don’t much care about all that. Yesterday, major indices reached tipping points below which things could get really ugly. Once such index we’ve focused on lately is the Nasdaq Composite (COMP.) Yesterday, it reached our downside target from October [see: Plan B] and, after a great deal of consternation, put in a bounce.

Whether or not the bounce holds is critically important, as it represents a backtest of a breakout which began two years ago. If the red trend line doesn’t hold, the index is susceptible to a drop of another 8-24%.Many other indices are in similar situations. Perhaps this is why we’re getting mixed signals from the algo drivers which have been such reliable indicators of future direction.