Bulls Cannot Afford Breach Of 2100+ On S&P 500 And 950-960 On Russell 2000

The announcement of QE4 last week failed to stabilize stocks.  This is unlike how they behaved during QE1/2/3.  Fear rules.  Just a month ago, greed did.  Sentiment will reverse.  Last week, major U.S. equity indices were once again slammed.  Even amidst this, the S&P 500 (SPY) seemed to want to stabilize, even as the Russell 2000 (IWM) defended the lows from February 2016.  This cannot be breached.  On the S&P 500, north of 2100 is key.

On the 15th this month, in an emergency meeting, the Fed announced it would purchase $500 billion in Treasuries and another $200 billion in mortgage-backed securities over coming months.  It also cut the fed funds rate by 100 basis points to a range of zero to 25 basis points.  This followed a 50-basis-point cut – also intra-meeting – on the 3rd.

The central bank is pushing the stimulus pedal flat to the floor.  It wants lower rates, among others.  Reacting to the Fed move, the 10-year Treasury yield dropped 22 basis points last Monday to close at 0.73 percent.  By Wednesday, however, rates had gone the other way, tagging 1.27 percent, before ending the week at 0.94 percent. (SPTL)

To be fair, during the three iterations of quantitative easing (QE) in the past, the 10-year did rally initially (Chart 1).  This time around, the grey bar labeled as QE4 dates back to late September last year when the Fed began to aggressively purchase Treasury bills in order to deal with money-market stresses.  It began to also buy Treasury notes and bonds only last week, with purchases of $111 billion in notes and bonds and none in bills.  Last week, the 10-year fell one basis point, while the 30-year was flat – not quite an outcome the Fed probably wanted.  After all, to “restore market functioning” was how Chair Jerome Powell described was one of the goals of the Fed’s stimulus efforts.

Thus far, equities have been much more rebellious.  Last week, the S&P 500 large cap index crashed another 15 percent.  Going back even further, the index closed at 3090.23 on the 2nd, just prior to the emergency 50-basis-point cut.  Friday, it closed at 2304.92. 

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