Thoughts of a dovish Fed have led the stock market higher since March 8. Moving the federal funds rate higher or lower will be data dependent, but in my opinion, the funds rate will stay at 2.25% to 2.50% through 2019.
Without fanfare, the Federal Open Market Committee (FOMC) will continue to tighten monetary policy by unwinding of its balance sheet. The Fed balance sheet was marked at $3.971 trillion on March 13, down $529 billion from $4.5 trillion where it was at the end of September 2017. In my opinion, the Fed wants to continue to unwind the balance sheet until later this year. I believe that the Fed will remain aggressive if stock market conditions remain stable.
Fed Chair Jerome Powell is likely to remain concerned about global growth as a reason for not raising the federal funds rate. Most on Wall Street will likely conclude that the FOMC may cut rates at some point this year. They do not recognize that that the unwinding of the balance sheet is a Fed tightening move.
The yield on the 30-Year U.S. Treasury Bond
The daily chart for the 30-Year U.S. Treasury Bond yield clearly shows the decline for bond yields that occurred when the FOMC shifted from raising rates to keeping them low. The bond yield peaked at 3.46% on Nov. 2 and declined to 2.89% on Jan. 4 as the stock market slumped. The bond yield rose to its 200-day simple moving average at 3.12% on March 1 as stocks recovered. Bonds remain a favorable as a "flight to safety" trade, but easy money by the Fed is re-inflating the stock market bubble.
Daily chart for the SPDR S&P 500 ETF (SPY)
The daily chart for the SPDR S&P 500 ETF (SPY), also known as Spiders, shows that the price moved above my monthly pivot at $281.13, which targets my weekly and annual risky levels at $284.74 and $285.86, respectively, where profits should be taken. My semiannual pivot lags at $266.14, with my quarterly risky level at $192.04, which is below the all-time intraday high of $293.94 set on Sept. 20. Could it be that it's time to consider buying in anticipation of the Fed statement anticipation and then sell the press conference?
Weekly chart for the SPDR S&P 500 ETF (SPY)
The weekly chart for Spiders is positive but overbought, with the ETF above its five-week modified moving average at $276.10 and well above its 200-week simple moving average, or "reversion to the mean," at $238.45. Note how this key average held at the Dec. 26 low. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 90.30, well above the overbought threshold of 80.00 and above 90.00, which I consider an "inflating parabolic bubble."
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Unwinding set to continue: The Federal Reserve will continue to tighten monetary policy by unwinding its balance sheet through the end of 2019 unless there are economic and market dislocations. The federal funds rate will likely stay at 2.25% to 2.50% as the high end the Fed's neutral zone of normalization.
Graph of the Fed balance sheet
At the close each Wednesday, the Federal Reserve takes a snap shot of its balance sheet, and the results are updated after 4:00 p.m. on Thursday. Sometimes, this graph is not updated until Friday or Saturday. Wall Street does not focus on this as an economic release, but I actively follow it as an important market-sensitive indicator.
Disclosure: The author has no positions in any securities mentioned and no plans to initiate any positions within the next 72 hours.