Fed Facade Fails: Everything Suddenly Questioned

Tyler Durden's picture

Submitted by Pater Tenebrarum via Acting-Man.com,

Triangle Breakout Failure?

The stock market’s initial reaction to the FOMC announcement was interesting, to say the least. After receiving the umpteenth excuse as to why rates can still not be raised, coupled with a promise that they eventually will be, the market initially rallied on Thursday. And why wouldn’t it? More free money is good for stocks, right?

 

800px-Marriner_S._Eccles_Federal_Reserve_Board_Building

The Eccles Building, home of the FOMC – Meetings

The rally only lasted for one hour though. In the final hour of trading, the market sold off and closed in negative territory. On Friday, the sell-off intensified somewhat. By Friday’s close, the SPX had lost more than 60 points from its Thursday intra-day high, a sizable chunk over such a brief time period. Below is a chart showing the triangle from which it initially broke out to the upside (ahead of the announcement) and a Fibonacci grid – resistance was encountered right between the traditional 50% and 61.8% retracement levels.

 

SPX fibo grid

S&P 500 Index, daily: the breakout from the triangle seems to have failed – click to enlarge.

As we are writing these words on Monday, the index is rallying again from the apex of the triangle to which it had returned as of Friday. So one cannot be certain yet that the breakout attempt will really turn out to be a failure – a clear break below the apex would however strongly indicate that a retest of the August lows was likely in the cards (at a minimum).

 

A Case of Cognitive Dissonance

Anyway, we have tried to come up with an explanation to the market’s sudden reassessment of the FOMC announcement. What is driving market psychology at the moment? One obvious point is technical: When major indexes return to the vicinity of a previously broken support level, some selling pressure will tend to emerge from traders/investors who were caught by surprise when the break below support originally occurred.

In terms of the content of the FOMC announcement, we may have evidence of a sort of communication breakdown (i.e., the official propaganda line is no longer accepted without question). On the one hand, the excuse given for delaying the rate hike was utterly laughable. Something happened in China? The Fed isn’t the PBoC. There was “market volatility”? Are the Fed’s rate decisions now influenced by every 10% correction in the stock market that happens to come along? If that is the case, there will never need to be a rate hike again.

On the other hand, the delay also makes the constant refrain about how copacetic everything is in the US economy ring ever more hollow. The reality is that important leading economic indicators (such as ISM data, Fed district surveys of manufacturers, industrial production, inventory to sales ratios, gross output data, capex ex-defense, etc.) are for the most part beginning to look worryingly weak and have regularly come in well below expectations in recent months.

So when the Fed stresses in its statement and its members intone in subsequent press conferences and/or public speeches how great everything is and that therefore, the rate hike must merely be regarded as postponed for a little while, it creates an impression of cognitive dissonance. We must stress here that we have no idea what the Fed “should” be doing – we really don’t care, as no-one can possibly know (least of all the “committee” of monetary bureaucrats). As we always point out, this could only be known if it were actually possible for central planning to improve on market outcomes, and that is simply not the case.

Still, the following questions have likely occurred to market participants: 1. is the Fed once again not hiking because it actually knows the economy is in trouble and is just not prepared to admit to this fact publicly? 2. is the Fed actually unaware of how weak the leading indicators look and therefore prone to hike rates right into a slowdown because it is focusing on unimportant data? The possible answers to either of these questions cannot make one feel very comfortable about buying into one of the most overvalued markets of all time – a market that is entirely dependent on continued monetary inflation (regardless of whether it is perpetrated by the central bank directly or the commercial banking system) and needs the economy at least to “muddle through” – lest all the debt corporations have amassed for financial engineering purposes come crashing down.

As to “irrelevant data”, no economic forecaster can possibly care about labor market data, except perhaps as a contrary indicator (for instance, as Lee Adler keeps reminding us, “blow-off-like” drops in initial unemployment claims to record low levels historically have a habit of occurring shortly before recessions begin). There is obviously little mileage in watching a lagging indicator in order to get clues about the future. And yet, given its absurd “dual mandate”, the Fed is widely held to have a special focus on these data – which it actually confirms in its statements.

 

Unemployment claims

When initial unemployment claims reach extreme lows or highs, they tend to become a contrary indicator – click to enlarge.

The other focus is the Fed’s equally bizarre effort to debase the purchasing power of the dollar in terms of consumer goods by 2% per year. No theoretical or empirical justification for this policy exists. However, what is (or at least should be) known about this policy, is that it was the main driver of several of the biggest economic catastrophes of the past century, including the Great Depression.

It is easy to explain why: whenever large productivity increases are putting pressure on the prices of final goods, “stable money” (i.e., debasement by 2% p.a. in this case) can only be achieved by massively expanding the supply of money and credit. The result are bubbles in financial assets, price distortions throughout the economy and consequently capital malinvestment on a grand scale. This feels good for a while, as it is associated with boom conditions – but every boom is really a capital consumption orgy. Most of the accounting gains this produces will turn out to be ephemeral and will be wiped out in the inevitable bust. The often long duration or great extent of a boom is not helpful in this respect: as a rule, the bigger the boom, the bigger the bust will be.

 

Conclusion

Forecasting stock market moves in the near term is always a bit akin to flipping a coin, but we have a feeling that one should (at least) expect the August lows to be tested at some point. The bullish camp does have one thing in its favor, and that is the fact that short term sentiment has turned quite bearish considering we have only seen a routine-sized correction so far (we have discussed the indicators as they pertain to different time frames previously – the longer term ones all remain in “red alert” territory).

On the other hand, one should keep in mind that the very same short term sentiment indicators haven’t keep the market from rising when they were hitting bullish extremes previously – which we believe is probably a sign that retail participation in the market has declined sharply (the less retail participation, the more likely it is that short term bullish or bearish sentiment data are not necessarily contrary indicators). What is undeniable is that market internals – a measure of overall risk appetite – continue to look very weak.

The Federal Reserve meanwhile (and the same holds to varying degrees for other central banks) is in danger of losing whatever “credibility” it has left in light of the bewildering discrepancy between reality (the shared continuum we all inhabit) and its statements and the growing impression that an ever bigger gap is opening up between its actions (or rather non-actions) and its promises and economic assessments.

We always point out that they are clueless – not out of malice, but primarily because they are clueless. It cannot be otherwise and has nothing to do with the persons on the committee, their personal commitment, education, or intelligence. In stark contrast to the “stable money” doctrine pursued by central banks, this is something that can be proved theoretically and shown empirically.

From a financial market psychology standpoint it is however very important that central bankers don’t appear clueless. A majority of market participants needs to be able to suspend disbelief to an sufficient extent, i.e., they must be able to share in the collective hallucination that central bankers actually do know what they are doing. When it is no longer possible to maintain this facade, many things are likely to be suddenly questioned – and among these is the question whether it makes sense to remain exposed to yet another gargantuan asset bubble.

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Kilgore Trout's picture

Triangles. Fibonacci grids. Chicken entrails.

slaughterer's picture

Fed is still in control.  Not the PhDs, but the BAs and the NYU interns they got pushing the "BUY ES Mini" buttons.  PhDs are over-educated fools making asses of themselves (Yellin, Bullard, et. al.).  The BAs (KHen, etc.) drink Red Bull and get the propping done behind the scene.  A modern day Siren's Song allegory.        

Kilgore Trout's picture

Gibson's law:

 "For every PhD there is an equal and opposite PhD."

two hoots's picture

The Fed only has to fool themselves or pretend they are. 

Captain Debtcrash's picture
Captain Debtcrash (not verified) two hoots Sep 22, 2015 10:04 AM

The next step is the E-Dollar. I started writing about it as soon as an obscure economist cooked it up as the solution the powers that be would attempt.  Now the most influential economists in the world are talking about it.  

BuddyEffed's picture

The FED can't be clueless because they are compelled to read Zero Hedge out of fiduciary responsibility and due diligence.

Implied Violins's picture

They are definitely NOT clueless. That's just an act.

MASTER OF UNIVERSE's picture

Z/H broadcasts in contravention to Federal worker rights to work in a sexually safe work zone so the FED could easily assert that they don't have to read Z/H and be exposed to sexually explicit images that many users have as visual aliases. In brief, political correctness trumps fiduciary responsibility, and due dilly ditty dum ditty doo.

KnuckleDragger-X's picture

The FED has finally hit the wall and nobody believes them anymore. I expect to see a lot of back-stabbing and screwing over in the markets soon.....

TeamDepends's picture

Some think they can keep the charade going indefinitely because they can print. No, they can't. They are not God. The wheels are falling off and it is plain for all to see.

Aussiekiwi's picture

Triangles. Fibonacci grids. Chicken entrails....I could not agree more, all rubbish, everybody knows that Bats droppings are the only way to predict the market.

Salah's picture

Re-compete the Fed.  NYC has had too much influence since its inception.

Temerity Trader's picture

Another well-written ZH article. Here is a short summary, save readers time.

The market may go up, or down; the Fed may hike or cut. The economy may be okay or collapse soon. Just can't tell for sure.

Ataxic Press's picture

Economics is a social science, which is in itself an oxymoron.

nscholten's picture

No Shit.

 

WE need inside info.

philipat's picture

IMHO it's more insidious than that. "The Markets" now comprise 80% algos which are controlled by both The Fed and The TBTF's, who are all in the same bed. Until the Banks get really fucking greedy and decide on a Sunday night to fuck The Fed, presumably when they realise that the whole thing is about to collapse, where would the impetus for reality come from?

Crisismode's picture

 

 

Why would the banks want to f*ck the Fed?

They OWN the Fed!!

 

Batman11's picture

Market participants have forgotten that the markets are supposed to represent the real economy and not follow every burp, wheeze and fart of Central Bankers.

Aussiekiwi's picture

Fundamentals are so 1970's, :).....now we have synthetic derivatives, how cool does that sound?..lets all say it together, 'synthetic derivatives'.....what could possibly go wrong.

Batman11's picture

Fundamentals have a nasty habit of re-asserting themselves.

 

aliki's picture

im still laughing from bullard calling cramer a cheerleader for stocks.

after i thought about it, bullard prefaced what he said with "i have a message for your jim cramer"

so im guessing THATS what the FOMC discussed at the meeting; how cramer advocates they keep rates lo for higher stock prices.

at least we have a window into what the fed uses as its "dashboard indicators"

Dr. Engali's picture

If they would just have left the market alone in 2009 at S&P 666 we would have been through this crap. Now mom and pop retail have to go through this raping again. But, I guess bankers will be bankers, and muppets will be muppets.

Hohum's picture

No. we wouldn't.  "Growing" is not simply achieved by plugging in the right fiscal and monetary policies.

HopefulCynical's picture

Correct. Growth is accomplished by UNplugging .gov from the marketplace, exept to hand out swift and severe punishment to anyone who wrongs or harms another, whether through malice or negligence.

Omega_Man's picture

it's surprising how many people make their living writing articles... I suppose we all could.

azusgm's picture

Rob Kirby gave an interview yesterday about the shenanigans surrounding this latest Fed move/non-move. Start at 31:00 to pick up the headlines recap or start at 32:30 for the interview.

https://www.youtube.com/watch?v=uIacCSTmkgw

I have not fact checked Rob Kirby's assertions, but he says that the yield on the T's did not move on the Chinese sales of greater than $100 billion of USTs. He says this is because the primary dealers had slimmed down their UST holdings prior to the Chinese dumping but then magically increased their holdings dramatically when the Chinese dumped. He called them "the Fed in drag". If so, this is QE4 and more.

Really comdemning of the Fed.

EDIT: Also goes into the Exchange Stabilization Fund.

JailBanksters's picture

everything sudenly questioned ?

No, No and No. Federal Politicians are afraid of asking questions. This is because of two thing 1: they're afraid the answer will require them to make a decision, 2: asking the wrong questions may jeopardize their support by the Jewish Community and re-election. The safest response is to plead Sgr Shultz, I know Noth-zing, Noth-zing. The only time they will act is when the public read about it in the newspaperz first.

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) Sep 22, 2015 10:31 AM

These ignorant fuckers are going to murder a whole lot of people with their shit.

sudzee's picture

Market needs a stress test. No FEDspeak for 60 days.

Clowns on Acid's picture

Where is Stanley Fischer ? Have not heard from that bastion of good will and free markets for a while.

Chuck Knoblauch's picture

Suddenly?

Only in your reality is this sudden.

q99x2's picture

Take one look at Yellen and you can immediately see that she comes from a long line of circus freaks and conmen. Arrest her for treason.

Cosmicserpent's picture

Treason? LOL! She is 100% loyal to the ruling class, the deep state ruled by sociopaths. A putrid little orc. One currency to rule them all and in the darkness bind them.

Ignernt idgit's picture

Yeh, I would not say "Suddenly questioned".  ZH has obviously been questioning the Fed cred for a long time.  But it is more clear than ever now, when there is talk one day of a Rate Hike, and the next day of NIRP.  Come on folks.  Just relax and have another pipe... 

withglee's picture

We must stress here that we have no idea what the Fed “should” be doing – we really don’t care, as no-one can possibly know (least of all the “committee” of monetary bureaucrats).

Wrong!

When you're clueless about what money is and what a properly managed MOE process is, you're going to have this kind of nonsense.

With a properly managed MOE process (and we know how to institute one):

  • Money is created by traders and in free supply all the time everywhere
  • Money is destroyed by traders on delivery of their trading promise
  • Supply and demand for money is in perpetual perfect balance
  • Responsible traders experience zero interest load
  • Irresponsible traders experience interest loads commensurate with their propensity to default.
  • Defaults are monitored and immediately met with like interest collections
  • Inflation of the MOE is perpetually zero.

The operative relation is: INFLATION = DEFAULT - INTEREST =zero.

No FOMC meetings are required!

polo007's picture

http://www.bloomberg.com/news/articles/2015-09-22/chart-watchers-zero-in...

Chart-Watchers Zero In on More Warning Signals for U.S. Equities

by Anna-Louise Jackson

September 22, 2015 — 12:00 AM EDT

- Technical analysis patterns suggest further weakness ahead

- Head-and-shoulders, Dow Theory point to shifting trend

Equity investors rattled by last month’s correction, the prospects for the global economy and the Federal Reserve’s interest rate policy can add a few more reasons to worry.

Several technical charts are sounding warning signals that the worst of equities turmoil may not be over. So is the market headed toward another selloff? It may depend on how much stock you put into such omens. Some investors see technical analysis as only so much voodoo, claiming past market patterns give no insight into future movements.

The latest signals come after Wall Street early last month was fixated on another chart -- the “death cross,” in which the 50-day moving average of the Dow Jones Industrial Average fell below the 200-day average. The two lines crossed on Aug. 11, and less than two weeks later the gauge dropped 10 percent in four days for its first correction since 2011.

With that in mind, here’s what the chartists are seeing in the latest batch of data:

1. A downward sloping neckline in a head-and-shoulders pattern:

The Dow this year has formed “probably the most famous pattern in technical analysis” -- and it’s not particularly encouraging for stock bulls, according to Murray Gunn, head of technical analysis in London at HSBC Holdings Plc.

A so-called head-and-shoulders pattern is a formation comprising two peaks separated by a higher peak. This particular one -- marked by shoulders in March and July and a head in May -- could be “the first crack in the dam” and is special because of the rarity of its downward sloping nature, he wrote in a report Monday.

“It’s a bearish pattern which could be signaling a new bear market trend,” Gunn said in an e-mail. Investors should watch for increasing volumes on down moves in this benchmark index as the next indication that sentiment is becoming more negative, he said.

If the Dow -- which climbed 0.8 percent to 16,510.19 Monday -- were to trade above 18,137, a level last seen in July, that would provide more optimism, he said. Otherwise, “a new long-term and potentially powerful bear market has started; one that should end below the 2009 low.”

That low, on March 9, 2009, was reached after a head-and-shoulders pattern occurred during 2007 and 2008 at the start of the financial crisis, HSBC noted. The date marked the beginning of the current bull market.

2. Dow Theory sell signal

The signal that’s “causing the most angst” for Jeffrey Saut, chief investment strategist at Raymond James Financial Inc., in St. Petersburg, Florida, is one that happened last month.

When the Standard & Poor’s 500 Index fell to a nearly 10-month low on Aug. 25, two other indexes were below an October 2014 low that many chart watchers were closely monitoring. The Dow Jones Industrial Average and Dow Jones Transportation Average both breached this level, flashing a so-called Dow Theory sell signal. Such a signal occurs when the industrial and transport indexes fall below the low of a previous selloff.

What’s behind this angst? There’s only been one false Dow Theory signal in the last 18 years, Saut wrote in a report Monday, which gives him “cause for pause.” There is reason for optimism, he said, because that one false signal came in May 2010 during the so-called flash crash -- the last time the 30-stock gauge lost 1,000 points intraday, until it happened during the market upheaval in August.

Saut said he hoped this latest signal will prove faulty as well, but that if these two gauges breach their Aug. 25 lows again, this “suggests a change in trend that must at that point be honored.”

Another reason for optimism: the S&P 500 has yet to breach its October 2014 trough. True, that index has nothing to do with Dow Theory, Saut points out -- chartists may want to create a new theory.