The Fed is Done?

Friday morning the jobs’ report gave the market the news it was looking for, or did it?  The jobs’ report showed that job creation was below expectations for the fourth month in a row.  Yes, that meant that the Fed will surely Pause on Tuesday, August 8th, but is it really what the market wanted to hear?

At the moment of the news, which came an hour before the opening bell, the buyers came in to bid stocks up.  The opening bell just brought in more buyers.  How many times have we said you should Sell Early Strength, especially when the market is in an overbought situation as it currently is?  At any rate, the high for the day was registered about fifteen minutes into the normal session.  

Those of you who follow the QQQQ’s saw it go from Thursday’s close of 37.12 to the 37.63 high of the day fifteen minutes after the opening bell on Friday.  From there the QQQQ’s leaked to a low of 36.62 about an hour before the close and then staged a big rally to close down only 0.17 at 36.95…quite the wide ride.  The rest of the stock market followed a similar pattern.

Our analysis has been that the Fed would not raise rates on the 8th due to the cooling of the economy (look at Thursday’s post for instance).  On Friday morning, the jobs’ report was weak enough to push several more people in our camp.  (The bond market was quite happy with the news and the dollar was quite unhappy, both as you would expect.)  The difference in the way most think and the way we think is how we expect the market to react to the Fed being done.  

We have thought it would react by selling off.  We weren’t sure that the first reaction would be a moon shot, like Friday morning was, but we are pretty sure that the aftermath will be a sell off.  Why?  Every time the market has heard news that would allow the Fed to stop hiking rates, we have seen a “Fed is done” rally.  When the news is actually that the Fed is done, we didn’t expect Another rally—Buy the Rumor, Sell the News.  

Ok, so it’s not Tuesday and the Fed has Not Paused just yet, so what’s the big deal?  We think the news (jobs’ report) was just what the Fed needed to know in order to hold the line on rates.  Not only that, the rest of the world figured it out at that moment, too.  We think the Actual announcement on Tuesday afternoon will be greeted with boredom and selling.  

For another take on the Fed’s situation, the True Contrarian (link on the left) presents an argument that the Fed needs to hold the rates level and announce that it will decide what to do going forward.  He thinks that if the Fed raises this week, the market will think it has “run out of bullets”, so to speak.  This would put the Fed in a powerless position, one that he doesn’t think they will allow.  Whether his analysis is right or not (we’re not sure the Fed is that shrewd), we do agree that there will be no rate hike this week.

Dow Industrials:  11,240.35  -2.24
QQQQ:  36.95
RYVNX:   23.65  (own)
RYAIX:  25.14
RYCWX:  42.40  (own)
TLT:  86.32  (own)
BEGBX:  13.71