The first FOMC meeting this week is an historic one for many reasons. First it is the last time Ben Bernanke will chair the meeting. Second, for the first time in the FED’s history the Chair will be held by a woman, and third with several new members the voting pattern will be scrutinised very closely by the markets.
Ahead of the meeting the markets have suddenly adopted a bearish tone, sparked by a combination concerns in emerging markets such as Argentina and less than stellar economic data from China.
This bearish tone was dramatically reinforced with the Nikkei 225 plunging almost 400 points or 2.5%, before closing at 15005. This heavily tone was taken up by Europe and the UK, but it is interesting to note (at time of writing) that both NQ & S&P500 futures are both trading marginally higher and recovering some of Friday’s losses.
Returning to the FOMC the key focus with no press conference and no economic forecasts forthcoming will be on the voting patterns of the new members. In particular two members who will be under the spotlight are likely to be Richard Fisher and Charles Plosser, both of whom are perceived as ‘hawkish’, but when last on the Board they only voted ‘no’ at meetings to bring in fresh policy easing. The markets are not expecting any deviation from the current tapering plan with a further $10bn reduction expected, assuming there is no major change in the economic outlook. The only dissenter who may cast a vote for continued ‘easing’ is Narayana Kocherlakota, and with Ben Bernanke had laid the foundations of tapering this should result in a relatively low key hand over to Janet Yellen.
In the medium term the main issues for the new FED Chair will be as follows: First, of course, is any future decision on interest rates, and if previous statements are to be believed then the no change principal will apply until unemployment falls below 6.5%. However, that said with unemployment levels now falling towards this figure the markets may price in an earlier rise, ahead of any decision. The only caveat to this course of action is the stubbornly low level of participation rate, coupled with an equally obstinate inflation rate which refuses to rise to the 2% trigger point.
From a technical perspective last Friday’s price action has flushed out all the bears who are now calling the top of this current market, and to try and judge whether this current bout of selling pressure is merely a healthy correction, or the start of a market rout, we really need to take a step back and consider those charts which are the most revealing.
In my humble opinion there are two key charts which need closer examination. The first is, of course, the VIX and the second is the NQ (futures of the Nasdaq). The reason for selecting these two is simply the first reveals the extent of market fear or complacency, whilst the second is a true barometer of economic growth, in particular as the tech sector is generally seen as leading any early recovery from recession.
For the purposes of today’s analysis of the NQ I want to focus on the weekly chart which gives us a broader perspective on the current price action. The first thing that is immediately clear is that the NQ (along with other principal indices) has been in a phase of sideways consolidation since the start of 2014. As such it has created a solid platform of support in the 3500 area and an equally stubborn area of resistance above the 3600 price point.
What is perhaps most revealing on the weekly chart is the volume associated with last week’s down candle, which is average, and certainly not suggestive of any major selling pressure. One only has to compare this with volumes in June 2013 to appreciate this simple fact. In addition, and prior to Friday’s sharp sell off, there was certainly no indicator either on this chart or any other time frame of a major sell off at this level, and what is far more likely therefore is that this is merely a much needed correction in the recent bullish trend, and which will pick up momentum once the first signs of a true economic recovery begin to appear in the fundamental landscape.
By Anna Coulling