A Look At Last Week's Fed Rate Adjustment - Larry’s Commentary

Wednesday’s brutal response to a mildly hawkish Federal Reserve rate announcement triggered two opposite market signals. First, the sell-off told us that the great secular bull market that began in 2009 is over. Second, the extraordinarily intense selling generated oversold readings that were bound to produce a short-covering rally, as they indeed have. The stock market is always coming and going at the same time, depending on which time frame one is using to measure the trend. It is an irrational and sometimes fragile creature of human emotions, and that’s why it can be so difficult to predict.

Nevertheless, let’s take a close look at the action, using the October 1987 Crash for comparison. It turns out the tape was actually more bearish this time, even though losses in percentage terms were nowhere near those of the earlier crash. In 1987, the McLellan Oscillator, which measures breadth, was a scary -110.14; on Wednesday, however, it registered an astounding -203.34. The advance/decline line differential was even scarier: -1921 in 1929, versus -3468 this time, and the three-day exponential moving average was -1594.85 versus–2444.89.

Why did the market not drop more than 3% on Wednesday when the tape action was worse than the 1987 market panic? Although so many stocks fell on Wednesday, many stocks did not collapse but moved only a few percentage points lower. One way of looking at Wednesday’s action is to call it a for-shock of what is to happen in January.

In 1987, the market had peaked in late August while our current market was Within 2% of its peak. Finally, we use a new Volume Momentum Indicator created by Buff Pelz Dormeier, the Volume Momentum Index. I use a variation based on a 34 day Money Flow Index – 34 day RSI. In 1987, the indicator was close to an oversold Condition while yesterday’s reading was closer to an oversold peak.

Combining the findings from the data, the market action told us that we would expect a Short-term bounce because the sellers were, on a short-term basis were flushed out. However, yesterday’s action which included a 90% down day confirms the two-week sell signal from my proprietary market model.

In June, my proprietary market model turned negative for 4 consecutive weeks. The sell-off in August took the model back to a strong neutral but no buy signal. Now, the model gave two additional sell signals. Usually, the model issues one or two signals before a major market change occurs. Never has there been six signals in one year. The one major variable that was missing was the normalization of the yield curve.

Markets have a history of falling after a prolonged inverted yield curve turns positive with short-term rates below longer-term rates.

Additionally, Saturday’s Barrons cover rang the bell on the end of the bull market. The cover headline said, “Stocks Could Gain Another 20% in 2025. Embrace the Bubble”. Contrary indicators never get better than that! The Barron’s bullish headline indicator was coined by famed market technician Martin Zweig. Zweig argued that Barron’s cover stories on market extremes were contrary indicators. So, what we have is a short-covering rally by swing traders to be followed with a painful drop of over 15%.

Yesterday’s drop was only 2.9% versus 22% on 10/19/87. In 1987, the market had peaked in late August while our current market was
Within 2% of its peak. Finallywe use a new Volume Momentum Indicator created by Buff Pelz Dormeier, the Volume Momentum Index. I use a variation based on a 34 day Money Flow Index – 34 day RSI. In 1987, the indicator was close to an oversold
Condition while yesterday’s reading was closer to an oversold peak.

Combining the findings from the data, the market action told us that we would expect a Short-term bounce because the sellers were, on a short-term basis were flushed out. However, yesterday’s action which included a 90% down day confirms the two-week sell signal from my proprietary market model. Additionally, Saturday’s Barron’s cover rang the bell on the end of the bull market. The cover headline said, “Stocks Could Gain Another 20% in 2025. Embrace the Bubble”. Contrary indicators never get better than that!

So, what we have is a short-covering rally by swing traders to be followed with a painful Drop of over 15%.

Happy holidays!!!