The First Sign Of Interest Rate Hikes

Published December 3rd, 2009 in Trading, Fixed Income Tags: bear markets, breadth, federal reserve, goldman sachs, interest rate, Jason Goepfert, morgan stanley, nonfarm payrolls.

The S&P 500 index has been struggling at the 1110 level for a few weeks. This shouldn’t be surprising to readers of this blog since we looked at several technical reasons why further gains were difficult as recently as late October and in November.

Stock prices have barely eked out 3% further gains since I asked: What Happens This Far Above the 200 Day Moving Average?.

After reaching 20% above their 200 day moving average, stocks have indeed had little room to the upside as I mentioned back in mid November. A significant development is the deterioration in leadership as breadth weakens even as the indexes push higher.

The S&P 500 now stands 16% above long term trend line. However, it climaxed last month 63% higher from the panic lows 9 months ago. Which brings us perilously close to the 71% average which has been the pattern for previous bear markets:

stages of bear market and aftermath Dec 2009

For more details on this, see: the Aftermath of Secular Bear Markets. Obviously, the market won’t necessarily play out exactly according to this blueprint. But looking at the historical pattern is still a useful guide.

Everyone from Washington to Wall Street is looking ahead to Friday’s nonfarm payroll numbers for November. And no wonder, they have a special significance because as this chart from a recent Morgan Stanley report shows, they tend to be the harbingers of the first interest rate hike:

sign of first interest rate increase Morgan Stanley report

You can download this report from the Trading Resource Section: “Morgan Stanley Euroletter Nov 2009″ (Reports & Articles folder).

Among economists, expectations are for a modest loss of 125,000 so we’re still rather far from the 350-400,000 level at which the Fed steps in and starts to tighten monetary policy. By the way, check out Wayne’s fantastic analysis on the the relationship between interest rates and equities posted yesterday.

But if you really want to have the inside track on this statistic, forget about your friendly neighbourhood economist and instead listen to Goldman Sachs’ estimates. Whether you believe in conspiracy theories or are just following the money, Government Sachs is more accurate than their peers on Wall Street, as Jason Goepfert shows: Goldman Sachs’ All Seeing Eye.