US stock markets have just been in a range since the beginning of February 2023. At the time of writing, my daily candles are showing potential major breakdowns which we will discuss in this Market Moment.
Here is the current stock market action:
Inflation ticked up higher than expected in January 2023 which got the markets moving. Mainly the bond markets.
We saw yields rise and this is something I spoke about in past articles. The Fed was hawkish and said rates will continue to move higher. Yet the markets were saying something different. It was almost as if they were betting against the Fed. But alas, yields have climbed as they should, and this has put pressure on stocks.
We then had Cleveland Fed President Loretta Mester come out yesterday saying she would have favored raising interest rates by 0.50% a month earlier. AND stating the Fed has more work to do:
“The FOMC has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do,” Mester said at a Global Interdependence Center conference at the University of South Florida Sarasota-Manatee College of Business.
“Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent,” Mester said.
When it comes to the next meeting and what the Fed might do, Mester said:
“I don’t want to surprise the markets,” Mester said. “We’re better if we explain. In that meeting there was an economic case for [a 50 basis point increase] in my view, but the market wasn’t expecting that. That does factor into my views about the proper thing to do at a meeting.”
If you recall, in December 2022 the Fed said its terminal rate would be 5.10%, or a range from 5.00%-5.25%. We are just a couple of more 25 basis points away from this.
The markets have been expecting rate cuts and a Fed pivot due to a slowing recession. But the Fed has been adamant that they will keep interest rates high until inflation is tamed. We could be heading to a point where the markets will need to go through some re-pricing.
But there is a market I am watching which could give some relief for equity markets:
The bond markets have been rising. Yields have been climbing, and I notified readers that the breakout in the 2 year back on February 3rd 2023 was going to impact stocks. Yields have now hit a major resistance zone. My arrows point out the trajectory that stock market bulls would want to see. If we see yields drop from these levels, the stock markets will hold their support zones.
The US dollar could be starting a reversal according to my criteria. Today’s close is important as it could confirm our first higher low in a new uptrend. The big question? Is the dollar rising due to a hawkish Fed? Or due to some other fear?
If we look at the S&P 500, we are in danger of closing below a range which has developed at a resistance zone. I am not calling for a major reversal, but a pullback down to retest our broken trendline could be in the cards.
The Nasdaq has been in a new uptrend since we closed above 12,000. I have been waiting for either a breakout above recent highs for a move higher. It has not happened. Perhaps another retest at 12,000 is in the cards.
Meanwhile the Dow Jones really has not moved with the S&P 500 and the Nasdaq in recent weeks. This market has largely been ranging since late 2022.