Side With Policy, a Dip to Buy

Macro Perspectives: Wed 29 Sep 21

Last week, we had a big technical breakdown in stocks, and we discussed the reasons to believe there may be some more pain ahead. That seems to be playing out.

That "pain" catalyst is mostly driven by the breakout (up) in interest rates. After all, as we also discussed last week, a change in the direction of monetary policy (from easing to tightening direction) is historically bad for stocks.

But in the current case, given that the Fed is moving away from emergency level policies, the policy stance will remain highly stimulative for quite some time (even as they taper, and even as they begin raising rates from the zero line). That stimulative monetary stance will ultimately continue to promote higher asset prices. For the moment though, the combination of:

1) a Fed change in direction,

2) concern about the Chinese financial system

3) a potential U.S. government shutdown has been enough to trigger what looks like a technical correction for stocks.

Let's take a look at an updated technical picture...

We observed the break of the trend (50 Day moving average) last week. This is an important line - it represents the 40% climb from election day, on anticipation of a massive fiscal spend. Now this line is broken, and we have a peak-to-trough decline thus far has been 5%.

After retracing back to the trend break - it looks like we could test the lows of last week (maybe in the coming days) - remember gap fills tend to resolve in the direction of the gap. A break of those lows would open up the scenario of a deeper decline toward the 200-day moving average (the blue line). That comes in just shy of a 10% correction.

It will be a dip to buy.