No Rate Hike and FOMC’s Dovish Tone Pushes U.S. Equity Markets Higher

If I was a long term investor and the Dow Jones Industrial Average pushes up into the 17,400-17,900 range I would be looking to take profits and sell any long positions in equities, mutual funds, and/or exchange traded funds. If the Dow Jones Industrial Average enters this range and the S&P 500 futures get to a significant overbought condition where they are over 80 points above the 10-bar moving average on the daily chart I will be providing a range of where I would be looking to:

1. Buy the exchange traded funds which move in the opposite direction of the U.S. equity markets. These exchange traded funds include DOG (Dow Jones Industrial Average), PSQ (NASDAQ Composite), SH (S&P 500), and RWM (Russell 2000).
2. Short the exchange traded funds which mirror the U.S. equity markets. These exchange traded funds include DIA (Dow Jones Industrial Average), QQQ (NASDAQ Composite), SPY (S&P 500), and IWM (Russell 2000).

I have stated that I expect significant volatility in 2016 and that the motto for the U.S. equity markets this year is to trade the aberrations. The U.S. equity markets are extremely overbought on the weekly charts; however that does not mean they cannot push up higher. I have a buy signal on both the daily and weekly charts for the U.S. equity markets. I expect this rally to last 4-14 weeks bringing the Dow Jones Industrial Average to a top in the April-May time period. In April-May of 2015 I called the market top when I stated that if the Dow Jones Industrial Average got into the 18,100-18,400 range I would be looking to sell any long positions and establish short positions. The Dow Jones Industrial Average got up to the 18,300 level and I then stated I was looking for a move down to the 16,100 range sometime in the summer of 2015 and the Dow Jones Industrial Average traded down to 15,371. I expect the exact same scenario to occur in 2016.

There is a gap above on the weekly chart for SPY up to the 203.87 level. The high today for SPY was 203.82, almost filling the gap. There are four gaps below on the daily chart for SPY. These gaps go down to the 182.86 level, equivalent to approximately the 15,500 level on the Dow Jones Industrial Average. I expect these gaps to be filled in 2016.

The Dow Jones Industrial Average has rallied from the 16,200 level because of central bank intervention. It has not rallied due to a strong economy or strong corporate earnings. Equity markets are heavily relying on central bank intervention to support them. If the equity markets and world economies were strong there would be no need for the Bank of Japan to go to negative interest rates and no need for the European Central Bank (ECB) to enact additional quantitative easing measures. Central banks have tried going to 0% interest rates, quantitative easing programs, and even going to negative interest rates. These experiments have not been successful in promoting growth in economies worldwide. 2015 fourth-quarter U.S. GDP was last reported at only 1.0%.

At 2:00pm today the FOMC announced that they would be leaving the federal funds rate unchanged. After the December 2015 meeting the FOMC stated that they were expecting a minimum of four rate hikes in 2016 with a target of 3.25-3.50% by 2018. Today the FOMC announced that they are now only expecting 2 rate hikes in 2016. The U.S. equity markets, gold, and crude oil responded positively to this announcement, pushing up to new highs for the day. The dollar dropped in response to this announcement which helped push commodity prices higher.

The Dow Jones Industrial Average closed up 74.23 (0.43%) at 17,325.76, the NASDAQ Composite closed up 35.30 (0.75%) at 4,763.97, the S&P 500 closed up 11.29 (0.56%) at 2,027.22, and the Russell 2000 closed up 7.84 (0.74%) at 1,074.51.

Long Term Signals:

NQ (NQ Mobile): Sell Signal on Daily Chart (03/16/16)
Entries: 3.99, 4.14, 4.29
Stop: 4.49
Status: No Fills

TWTR (Twitter): Sell Signal on Daily Chart (03/16/16)
Entries: 16.89, 17.59, 18.29
Stop: 19.27
Status: No Fills

BBD (Banco Bradesco S.A.): Sell Signal on Daily Chart (03/16/16)
Entries: 6.83, 7.00, 7.17
Stop: 7.42
Status: No Fills

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

If crude oil pushes up into the 40-41 range it will not last. Iran has stated that they plan to boost their crude oil output to 4 million barrels daily before they will even consider participating in a possible production freeze or cut. Shale producers will be pumping out 9 million barrels of crude oil daily. Crude oil inventories are at a record high (over one billion barrels worldwide) and are increasing further with production continuing to outpace demand. If the Dow Jones Industrial Average pushes up into my range I would be looking to sell any oil stocks. When the U.S. equity markets start to break I do believe we will see crude oil head back down.

Crude oil pushed back up above the 38 level today following the announcement that the FOMC is now only expecting two rate hikes in 2016.

Crude oil was up 1.88 (5.12%) today, closing at 38.60.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

I had been looking to buy gold in the 1,195-1,215 range. On March 15th, gold traded down to a low of 1,226.00. I am still looking for a pullback in gold on the daily chart for an opportunity where I would be looking to buy gold and the gold stocks. I believe the next push up in gold should bring it to or above the 1,300 level. The gold stocks I am looking at include ABX (Barrick Gold), AUY (Yamana Gold), GLD (Gold ETF), KGC (Kinross Gold), and NEM (Newmont Mining).

Immediately following the FOMC’s announcement gold exploded to the upside. Gold has not rallied due to inflation. Gold has rallied partly because of investors flocking to gold due to fear of instability in markets worldwide. Gold has also rallied as the gold traders did not expected the Federal Open Market Committee (FOMC) to raise the federal funds rate in the March meeting with economies slowing worldwide and the International Monetary Fund (IMF) lowering GDP expectations. As rates are increased commodity prices go down. I do believe the FOMC may choose to raise the federal funds rate one time in 2016 but not until after the presidential election. The FOMC decided to wait seven years before they increased the federal funds rate from 0%. Normally when the federal funds rate is raised it is early in the cycle of a recovery, not seven years later. A few years ago when unemployment was at 8.5%, the FOMC maintained that they would start raising the federal funds rate once unemployment got down to 6.5%. The FOMC did not raise the federal funds rate until unemployment was at 5.0%.

Gold was up 30.30 (2.46%) today, closing at 1263.10.

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