The Real Trend

IF IT AINT BROKE - Most of the attention this week will be on tomorrow's FOMC decision. While no change is expected on rates, this could be an interesting one, as it will give the market some more insight into just how much the Fed is still projecting another rate hike in 2017. The last we saw, the Fed was still moving in that direction, though investors have continued to doubt the Fed's plan. After all, this is no different than any other trend. The trend here has been to call the Fed's bluff at every turn and continue to expect the Fed to do less than it sets out to do. This bet has paid off handsomely over the years and this has been the real trend to watch. This is the trend that has helped to keep those stocks running up to record highs, even now, nearly ten years after the financial markets crisis and even with the Fed initiating the monetary policy normalization process. So while it makes sense to expect the Fed to finally catch the market off guard, the market is not going to change what's been making it a killing until it's proven wrong.

cartoon september 19

JUST A SMALL FACTOR - The one thing that has inspired additional demand for equities in 2017 that wasn't necessarily given proper consideration months back is the Trump administration. The policies proposed by the President are policies that are meant to bolster sentiment. So when you talk about tax cuts, investors are going to get excited. The President has also tried to capitalize on the run up in stocks, taking credit for this latest record run. I'm not getting political here and I believe most Presidents would do the same, But it's not accurate for the President to take credit for the run. cuts and other proposed policies are good for sentiment, but the run in stocks continues to be driven off monetary policy measures in recent years and the low interest rate environment. Nothing more. The point here is that maybe we've seen a little Trump rally, but it's not backed by a force that will be able to contend with the storm of monetary policy normalization.

THE QUESTION - It's never easy to call a top and with this one it has been exceptionally challenging, requiring plenty of patience and resolve. I had thought we would be seeing a capitulation already as the Fed pushed rates up, but as of yet, the Fed has been able to offset the hawkish moves, with dovish speak. rates are still super depressed and attractive to investors. And so, in some form or another, I continue to believe the catalyst for a reversal in the stock market will come from the Fed. Perhaps it manifests in a way like it looked like it could do back in June when the Fed made that welcome and refreshing decision to err on the side of policy normalization (worry more about what happens if we don't hike than if we do hike). But we all know that the Yellen testimony that followed days after had backed away from this. And so, it was a story of the same old deal and stocks were up up and away again. So now we look at this week's decision and it will come down to the following: Will the Fed shock the market this week and follow through with its timeline for another rate hike this year? Perhaps. If it catches the market off guard and tries to get back to that June message, it could get nasty out there and the stock market will suffer for it.

Don't rule out the possibility for another sharp decline in $USDJPY.

STRATEGY - Looking at the positions, I continue to see opportunity to be long the US Dollar against the Canadian Dollar and Pound. Both the Pound and Loonie have enjoyed nice runs and are at risk for corrections. With the Pound, I am less bearish medium-term and would be happy to exit the short position down below 1.3000 and then look to buy back into what I believe is the start to a longer-term run up for GBPUSD. The Canadian Dollar on the other hand is not as attractive to me longer-term and I see room for this currency to go through another intense period of weakness in the months ahead. I'm also really interested in USDJPY at the moment and though I'm not trading it, I'm looking to see if the market will ultimately stall out into this latest rally and come crashing back down. I believe it can and will be looking to trade it if I can.

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