SuttonWatch.Net: Will The Federal Reserve "Blink" At Its Next FOMC Meeting?

At its December 2015 FOMC meeting, the U.S. Federal Reserve raised interest rates for the first time in almost a decade. While this first hike was only 25 basis points, post-meeting comments from FOMC voting members suggested that eight more 1/4-point hikes would be forthcoming over the next two years.

The U.S. stock market, as measured by the S&P 500 Index, fell sharply in the first three weeks of this new year. If we start with the closing year-end 2015 level of 2043.29 and then compare it to the January 20th intra-day low of 1812.29, the decline was 11.3%. And if we measure the January 20th intra-day low against the May 21st, 2015 all-time high in the S&P 500, then the decline was 15.1%. I don't think it's a stretch to conclude that at least some of investor concerns this year so far have been related to the actual and apparent expected tightening of monetary policy by the Federal Reserve. Don't fight the Fed? Isn't that the best investor advice ever written in the shortest possible words?!! Of course, maybe the collapse in crude oil prices had something to do with the collapse in U.S. stock prices, or lower economic growth in China, or the warm December weather, or the cold January weather. Pick your poison? Maybe it's Donald Trump's fault? You're fired!

I don't think it really matters why U.S. stock prices caved from January 4th through the morning of Wednesday, January 20th. What matters is where do we go from here? My computer trading system indicates that U.S. stock prices are going higher from here. The rebound from Wednesday's intra-day lows has been meaningful, and I don't think this rebound is a "dead cat bounce". However, right now my own long positions only include energy, commodities, steel, and precious metals stocks. I recently read that over the last six years the best strategy has been to buy the general market (SPX) one week before each FOMC meeting and sell one week after each FOMC meeting. I was stunned by the results in this report. The "buy & hold" portfolio earned about 12% annually while the FOMC "two week" holding period strategy yielded more than double the buy & hold result. I think it's interesting that the U.S. stock market bottomed on Wednesday, January 20th, one week prior to the FOMC meeting this coming week. My best forecast here is that U.S. stock prices will be higher at least through the end of this month and maybe even for a couple of days in early February (consistent with the FOMC trading strategy of buying one week before each meeting and selling one week after each meeting)..

In my last blog dated Sunday, January 17th, I predicted that crude oil prices would bottom out early this past week and that prices would not stay below $30 a barrel for very long. For now, this looks like a pretty decent call. Of course, when prices were collapsing early Wednesday, my energy positions were testing my patience to the limit. However, the rebound in energy prices late Wednesday, Thursday, and Friday was nothing short of spectacular! One of my energy stocks, SM Energy (SM), actually rebounded 60% from Wednesday's intra-day low to Friday's intra-day high! My simple view here is that WTI Crude Oil prices will probably not trade significantly below $30/barrel for the remainder of 2016. $40/ barrel is a reasonable forecast for the current rebound over the near term (120 days), but I suspect prices will overshoot on the upside at one point in 2016.

While Gold and Silver are among the few winning positions so far in 2016, with gains of 3.4% and 1.4% respectfully so far in January, most of the precious metals mining shares have been poor performers. While I am not sure why gold/silver mining shares have been weak (except ABX & AEM), It's not hard to imagine that the specter of four interest rate hikes this year from the U.S. Federal Reserve and the resulting positive impact of higher U.S. interest rates on the U.S. Dollar may have investors in the precious metals arena just a little bit nervous (understatement!). But what if the Fed backs down this coming Wednesday from its hawkish stance as signaled following its last meeting in December 2015? What will happen to gold and silver prices when investors realize that the U.S. Federal Reserve is NOT going to raise interest rates in 2016, and it may even lower them! And if U.S. economic results continue to disappoint, could the Federal Reserve actually initiate another round of "quantitative easing" (QE4)? For gold and silver prices to rally sharply, all that has to happen is for the FOMC to decide this coming week that maybe four rate hikes this year are off the table for now. While the Fed probably won't announce this action definitively, it probably will convey a much more dovish monetary stance, and gold, silver, and related investments will then surge sharply higher!

Bottom line:

1. The U.S. Dollar looks vulnerable to a major correction

2. Gold and Silver prices look ready to breakout on the upside

3. Gold and Silver mining shares look historically cheap right now