Updated for recent trades
It's hard to quantify how much of that 220% gain in SPX was because of the Fed zero rate policy. Some argue that all of that gain was due to the Fed and some argue none. To me, it is a reasonable assumption that at least 25% of that gain (367 points) is "the fluff" due to over eight years of "free money". Now that the era of free money is about to come to an end this coming Thursday, the fluff will continue to come out. So far 173 points of the fluff has come out in the first half of the ongoing correction. 194 more points are to go in the second half.
It's half time now and the second half is still to come.
Why The Fed Will Raise This Week:
- Credibility. The Fed, Yellen especially, has been saying for a while now that they are "data driven". The most important data they are looking at are employment and growth. They both look good and the Fed will raise to show that they are credible and the Fed does what the Fed preaches.
- The Fed is aware of the fluff that they have created in equities with their zero rate policy. The Fed wants the fluff to come out, but come out in an orderly fashion (i.e. a correction). They are also aware of the fact that the more they wait, the bigger the fluff gets. The Fed is a student of history. Both recent and not so recent stock market history clearly shows that when a big fluff comes out of equities, the order gets thrown out of the window and chaos (i.e. a crash) takes over. Nobody wants chaos.
- Stock markets are discounting mechanisms. The fluff in a market eventually comes out either via a correction or a crash. Now that a correction has already started in our markets, the Fed wants it to run its course to get the fluff out sooner than later in an orderly manner.
- By raising rates a modest 0.25%, the Fed puts a "silver bullet" in its otherwise empty "belt" to be used later if necessary (i.e. cutting rates if needed to prevent a financial crisis).
Where Are We Heading Longer Term (Weeks)?
Where Are We Heading Shorter Term (Days)?
Shorter term, it's going to be volatile this coming week. SPX very likely rallies on Monday and possibly Tuesday to test several downtrend line resistance levels around 1970 to 1980. Those tests would very likely fail and SPX would sell off later in the week as the Fed announces its first rate hike in eight years.
SPX: S&P 500 Index D-SMA: Daily - Simple Moving Average
DJI: Dow Jones Industrial Index D-EMA: Daily - Exponential Moving Average
DJT: Dow Jones Transportation Index PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index PUL: Primary Uptrend Line
RUT: Russell 2000 Index ADL: Active Downtrend Line
OEX: S&P 100 Index AUL: Active Uptrend Line
NDX: Nasdaq 100 Index DTL: Dynamic Trend Line
TUL: Tentative Uptrend Line TDL: Tentative Downtrend Line
Disclaimer: The views expressed are provided for information purposes only and should not be construed in any way as investment advice or recommendation. Furthermore, the opinions expressed may change without notice.