The market is on fire right now and it has been a straight line up in the past month. It seems nothing can stop it. With the all time highs just within a spit distance, it seems to be a certainty that we will see new all time highs very soon. What an early Santa Claus Rally! This is a market in which euphoria is everywhere and no one seems afraid of any risk. SPX is over 300 points over its 50 DMA, which I don't think has ever been seen before. Usually a 50 points above is already quite stretched. Talking about a nose-bleeding overboughtness! This is kind of setup that can easily lead to a sudden out-of-the-blue crash that can wipe out one month worth of gains within days. The air is very thin up here and the risk is enormous accordingly. BE CAREFUL!
This euphoric run is purely driven by the expectation that the Fed will cut interest rates soon. Now let's review the historical data to see what would usually be associated with a Fed rate cut.
The graph below helps us appreciate every pause following rate hikes since 1955. The red circles show that each of the last ten recessions followed a series of rate hikes and a pause. The three green instances show brief pauses followed by rate cuts but no immediate recession. Given how much the Fed raised rates and the record debt levels, the odds favor another red circle.
In other words, even if we do get a Fed cut early next year, the chance is high that that cut will lead to a market decline, not up moves. Understood?!
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