Technically Speaking: January Losses Lead To February Declines

In this past weekend’s newsletter, I discussed that the markets finally got a bounce as Mario Draghi announced the potential for more QE. To wit:

“Furthermore, with the markets VERY oversold currently, the expected bounce is likely starting now.”

It is that very oversold condition that has continually suggested that something would happen to elicit a short-term retracement in the market. Not to be disappointed it was the promise of more liquidity by the ECB and Mario Draghi that elicited a massive short-covering rally on Friday.

With the Federal Reserve now heading into a two-day FOMC meeting, there are many hoping the Fed may come to the markets rescue. This could come in two forms:

Either insinuation will excite the bulls and create a rather significant short-covering rally in the short-term. However, such a rally would not change the ongoing deterioration in the underlying fundamental and technical backdrop. With price trends still primarily negative, it is still a “sell the rally” market currently.

The problem for the Federal Reserve is that they painted themselves into a corner in December when they hiked rates by saying:

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

What they do on Wednesday will likely be a “make or break” moment for the markets. I would not be overly complacent about existing portfolio risk. However, with the markets deeply oversold, I do expect the short-term rally to continue for the moment.