Coal Stockings

The Fed decision came on Wednesday where there was no relief or change to policy that would be considered friendly to the stock market. The Fed will continue to shrink its balance sheet of bond holdings and look to raise interest rates 2-3x in 2019. In response, stocks continued to slide into the close on Friday.

The magnitude of this correction is becoming quite large and implies that the stock market made a top in 2018 and is correcting the rise from the 2009 low. The chart below is the S&P 500 index ($SPX) over the last 20 years. In technical analysis we can use the retracement levels you have seen me use on shorter time frame charts for longer time frames to identify potential price levels where there may be support. So, the chart below is a “monthly” chart where each candlestick represents one month of price action. As you can see, this month’s candlestick is the biggest on the chart that tells me this correction is just getting started. The 5 wave pattern I have outlined is a common pattern called an Elliott Wave that unfolds in 5 segments. It looks as though we are in the 3rd wave which typically has the highest level of intensity and price movement. On Friday, the S&P 500 closed at the 23.6% Fibonacci retracement on Friday, however, the most likely level of major support is at 38.2% which is near the highs of 2015. We’ll see how this plays out but I think this analysis gives you an idea of what to expect in the coming weeks/months.

One thing is clear, the Fed is not coming to the rescue. Jerome Powell’s Fed is popping all the bubbles.

What to look for next week:

  1. Santa – comes on Tuesday but not for Jerome Powell.
  2. Half day on Monday due to the holiday. The lack of liquidity could exacerbate any move (up or down).
  3. Tax loss selling. Many stocks are down 30-50% from the October highs so selling may be motivated by risk reduction and taxes.

Chart of the Week!

The Fed is shrinking a $4 trillion bond portfolio as part of their “Quantitative Tightening” program. The Fed’s holdings have fallen to $4.1 trillion from $4.5 trillion a year ago and are set to reach $3.6 trillion over the coming 12 months. The Fed’s program of buying bonds has been the lifeblood of the stock market as this money has largely been recycled back into the stock market via share buybacks. Now comes the reversal..

Economic & Central Banking Snippets 

  • Fascinating paper from Samuel Reynard at the Swiss National Bank where he concludes the Fed’s QE program has provided the equivalent of -5% interest rates – you can read it HERE. From the abstract: “With quantitative easing, the U.S. Federal Reserve has provided broad money to the nonbank sector in exchange for debt securities. This paper estimates this broad money injection to be equivalent to a hypothetical negative policy (federal funds) interest rate of approximately 5 percentage points. Given the size of the Federal Reserve balance sheet and with other things being equal, the policy interest rate will have to be set higher during the exit relative to the pre-QE period to obtain a desired monetary policy stance.”
  • The Bank of England has warned that Brexit uncertainties had “intensified considerably” over the past month as it left interest rates unchanged at 0.75%. With little idea whether the UK is going to leave the EU smoothly or crash out with no deal in March, the bank’s Monetary Policy Committee for the first time gave no indication of how recent data were shaping its thinking on monetary policy.
  • Japanese Prime Minister Shinzo Abe’s famous three economic arrows are failing to hit their mark. Debt that stands in excess of 250% of GDP is hampering all efforts to resuscitate inflation and sustainable growth in the world’s third-largest economy. Third-quarter GDP contracted 2.5% on an annualized basis, the worst performance for four years.

Macro Snippets

  • Oil prices are down nearly 40% since early October. Investors have grown increasingly jittery that slowing global growth will weigh on fuel demand, while major oil exporters have failed to alleviate concerns about an oversupplied market. (WSJ)
  • Credit markets are freezing up. This month companies have NOT been able to raise capital through the $1.2T US high-yield bond market. This would be the first full month since November 2008 (just after the failure of Lehman Brothers) that not a single junk bond was able to price. (Block Report)
  • A gauge of US homebuilder confidence fell to its lowest level in over three and a half years in December, as concerns over housing affordability continue to weigh on the sector’s outlook. “We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs,” said NAHB chairman Randy Noel. (FT)
  • Finance minister Bruno Le Maire told journalists on Monday that France will impose a new domestic tax on big international tech companies such as Google and Facebook starting next month. The taxes are expected to raise €500m annually for the state.
  • FedEx released their earnings this week which highlighted the reality behind the economic slowdown going on overseas: “While the US economy remains solid, our international business weakened during the quarter, especially in Europe…Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near term.” (Boock Report)
  • Marijuana producer Tilray Inc. is teaming up with the world’s largest brewer, Anheuser-Busch InBev, to research cannabis-infused non-alcoholic drinks for the Canadian market. Both companies said in a statement that they will invest $50 million each in the joint venture. The funds will be used to study beverages with cannabidiol, or CBD, a component of cannabis that does not cause intoxication, and tetrahydrocannabinol, or THC, the substance that makes people high.

That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at

Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client. 


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.