The big switch in the Dot plot to match Swaps markets pricing of fewer cuts for 2025 caught the market off-guard on Wednesday, resulting in a trend violation for SPX while the NASDAQ managed to show divergence positively. SPX price seems to have caught up quickly with the recently deteriorating market breadth, but given the SPX cycle bottoming by late this week, I suspect that weakness proves short-lived and minor in scope before stabilizing and helping markets begin a late December rally. Overall, this weakness appears short-term only, and some evidence of capitulation will likely result in a bottoming process by the end of the week for US stocks.
Bottom line, Wednesday’s post-FOMC meeting volatility proved extreme but likely does not extend past 3-5 days before beginning a rally into the end of the year.
Dismal breadth readings along with bearish market cycles had certainly given an advance warning sign, and while many sectors along with the DJIA itself had been falling in recent days, Wednesday proved to be the first time that SPX and QQQ had reacted negatively to join the plummeting breadth figures.
Heading into Wednesday’s trading, there were only 18.7% of all SPX names positive on the month, and the DJIA had fallen for nine straight sessions, its longest losing streak since 1978.
Following the FOMC meeting, when we learned that three non-voters disagreed with this latest rate cut and the new Cleveland Fed President dissented, algorithmic trading kicked in to show a huge amount of selling pressure. Thus, this “Hawkish cut” helped align the FOMC with what the Swaps market had been suggesting could be the “correct” number of cuts for 2025. (In other words, prior to the FOMC meeting, the Dot plot showed a possibility of four cuts in 2025, while the Swaps market had indicated just two. This has now been adjusted, and the central bank’s dot plot is currently showing only two more for the entirety of 2025.)
Thus, there was divergence on Fed policy between the market and what the Dot plot suggested along with divergence in market breadth compared to where the SPX had been trading. Wednesday’s post FOMC adjustments seem to have brought both back in-line.
With regards to actual price action, it’s difficult technically to consider a break of a four-month uptrend on some of the worst market breadth since early August as an immediate “buying opportunity” when SPX price closed right near the lows on the session on a “90% Down day”.
However, as shown below, the price is closing right near the levels of mid-November and right near the upper edge of SPX’s Ichimoku Cloud pattern. This level also lines up with a 23.6% Fibonacci retracement zone. Thus, there is some confluence to suggest the possibility that the area near 5870 could hold. Furthermore, the true zone of time-based support seems to revolve around the Winter Solstice time in December, which occurs this coming Saturday.
My cycle composite suggested a good probability of a low near 12/19 -12/23 timeframe and then a rally into mid-January. Given the combination of a likely cycle low along with some Fibonacci based importance both near 5870 along with early November lows near 5700, I don’t expect too much more selling in the days to come.
Overall, my sense is that stability starts by Friday of this week and/or Monday/Tuesday of next week ahead of the Christmas holiday and can provide a bounce into the last part of December following a rough start for many sectors in December.
S&P 500 Index
TICK reading hit new all-time record extremes intra-day
The TICK index, or the difference between the NYSE securities moving on an “Uptick” versus those moving on a “downtick,” plunged post-FOMC meeting to new extreme records intra-day.
This brought about some abnormal downside market volatility, which caused most investors’ computer screens to show a bit too much “holiday red” than many likely preferred this time of year.
As seen on hourly charts, the TICK reading hit a low of -2143 and then -2170 which on an hourly chart, stabilized just above -1500 before closing the session -256. Thus, this proved to be a record number of NYSE securities showing a downtick on an intra-day basis.
This reading certainly qualifies as “capitulation” despite some other fear measures not reflecting that as of Wednesday’s close. Thus, while the outsized high-to-low range of Wednesday’s trading, along with extreme negative breadth on a trend line violation, doesn’t immediately suggest “buying dips” from a technical perspective, other measures suggest that SPX is likely close to making a low by early next week. This low might materialize by Thursday or Friday of this week.
TICK Index
Upward thrust of 10-year Treasury yields also likely contributed to Equity market volatility
I did not expect an immediate breakout of Treasury yields above November peaks this December, but this is what occurred during Wednesday’s session.
Unless immediately erased, this upside escalation in Rates is thought to be a negative to risk assets given the breakout of this trend.
It’s important that either Thursday or Friday show some extent of this reversing course, as weekly closes and breakouts tend to have more validity than daily breakouts.
Overall, unless ^TNX -2.41% were to get back down under 4.491% by end of week, this likely could result in US 10-year Treasury yields pressing higher to 4.73% to test Spring 2024 highs.
US Government Bonds 10 YR Yield
Markets are now pricing in only 22.4 basis points of Fed Rate cuts by the end of next July
The surprising move in the Dot plot on Wednesday following the hawkish rate cut by FOMC today resulted in the Swaps market making further downside adjustments to the probability of Rate cuts in 2025.
The current amount of total rate cuts by the end of next July has now dropped to 22.4 basis points, or roughly 1 FOMC rate cut.
Thus, the rapid change in the 2024 economic data from signaling early year weakness to late year strength vs. economic expectations has resulted in yields spiking up sharply in recent months along with the likelihood of rate cuts being dramatically reduced as per the swaps market pricing.
Normally, when the FOMC dot plot doesn’t line up with what the market has priced in, the rapid change tends to exacerbate market volatility, and that’s precisely what looks to have happened on Wednesday.
Fed Funds Futures
