“Charts R Us” – Which Charts to Watch after the Fed’s Interest Rate Decision

Troy, Charles and I did a 90-minute livestream last night covering our teams thoughts on various topics.  Here’s the link to that broadcast, we hope you subscribe to it and my stock talk You-Tube channels. In it we covered a lot of ground including yesterday’s Federal Reserve meeting and actions, the upcoming Presidential election, seasonals in the stock markets, government economic data, inflation and economic growth and where we stand versus our teams 2024 overall market outlook and the second half of the year.  So far, it pretty much trading on plan for the year and we have not changed our optimistic outlook for year end 2024 of around 5800 on the S&P500 since we first alluded to it in 4th quarter 2023.  Our early 1q25 target remains 6000 but given the current backdrop and what I am seeing, I lean that the 6000 figure is too low by up to 200 S&P500 under a soft-landing, goldilocks, year end FOMO move up post-election extending into inauguration time.

For today I’m sticking with a few important charts.  Regardless of what you might hear on TV or the internet about this or that chart being the key or most important to watch, none is more important than the largest stock market index in the world, the market cap weighted. S&P 500.Here’s a chart of the daily S&P500 YTD.

Chart of the daily S&P500 YTD

For the most part its up and to the right with weakness during its normal weak post July 4th holiday into early August.  The chat boards and financial networks were in panic mode after the August 1st move down. Why? Because that candle on August 1st is called a bearish engulfing candlestick formation. What is a bearish engulfing formation you ask? The pattern consists of an up candlestick followed by a big down candlestick that eclipses or “engulfs” the smaller up candle. This is what it generally looks like,

Candlestick Formation Example

Technicians consider the worst of these formations when the engulfing candle has a big up opening and closes on or near the engulfing low on the day.  This is considered a bearish reversing trend usually occurring at the top of an uptrend. Given the timing of this move down, negatively oriented traders were out in mass calling that THE Top was in, many not only for the summer but also for the bull market.

The second most important chart to me remains the charts of real interest rates.  Real rates are the premium a Treasury bond investor receives above the inflation rate for holding US Government bonds.  This is really the main lever the Fed has at slowing inflation but its also the one that can cause companies and investors to hold back from investing on hiring or capital investment and cause recessions in the US. Here’s the super short term 1-year real-time real interest rate we’ve discussed all year.  Only during dot.com, pre-GFC, late 2018, and recently has this yield premium exceeded 3.75%.  This is why many prominent hedge fund managers have finally said the Fed is too tight and recommended that they cut rates by 50bos at yesterday’s meeting.  An opinion our team has had ever since they skipped cutting rates at the July meeting.

Super short term 1-year real-time real interest rate chart

The final two charts I want to focus on are ones of volatility. First is the chart on realized volatility or RVOL index on BBERG.  This is the actual level of volatility that stocks are experiencing in the market or on your screen.  As you can see the trend had been lower for 18+ months but has recently moved from near 8 to over 20 and now sits around 14.

Chart on realized volatility or RVOL index on BBERG

I remind investors that historically 1-volailty is quite seasonal with normal spikes higher in mid-summer and early fall and lower trends in winter and spring. And 2- realized volatility is also normally higher in the 2 months preceding Presidential elections, the period we are entering.

However, when I discuss Volatility, I also feel compelled to discuss implied volatility.  This is what is priced in options markets.  This is the market participants’ best guess of what the future will hold.  The next chart is the 2-month futures contract for forward volatility.  This contract expires in mid-October so it’s the one pricing volatility into 1- a normally weak seasonal stock period as well as into the election.

2-month futures contract for forward volatility chart

As one can see it too has risen during a normally volatile period, however it is starting to come down off its feverish high.

Finally, I must point out that regardless of the way we may feel as investors or voters about the election and volatility in markets, the numbers show that volatility is actually declining into the election and being priced for a gentler escape from November than 6 months ago when things looked more certain about who was running and who might win.  If you don’t believe me, here is the Vol curve now and 6 months ago.

Vol curve now and 6 months ago

The blue line was the forward vol curve 6 months ago and the white line is the curve as of 9/15.  Looking at the data points that overlapped currently are Sept expiration (UX1), Oct Expiration (UX2) and Nov Expiration (UX3), in all cases the current price of insurance is below what market makers were asking for 6 months ago and future insurance costs for 2025 are below what it would have cost you to hedge fir the 2024 election for the better part of the year.

So wrapping it up, what does this mean for you and your money?  It means the odds are rising that regardless of whether your favored candidate wins or loses the election in a few weeks, your money in the overall stock market will be treated ok for late 2024 into the inaugural ball in late Jan 2025. That our 6000-upside optimist target for 1q25 might actually be a few hundred points too low, not too high.

That said, for now, don’t get greedy when stocks are up on spikes and volatility is low.  Don’t panic and sell stocks when volatility spikes and stocks drop.  Our investment team does believe that over the next few years a more active stock management style will begin to reassert itself and be rewarded relative to passive index investing. If over the years you have found yourself reacting emotionally in your portfolio to Presidential elections and their uncertainty, or when volatility is high like it was in July, now is the time to step back, take a deep breath, give your advisor a call and talk walk through your long-term financial plan.

If you are uncomfortable with wider range of possible equity outcomes, the Oak Harvest team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges as a shock absorber for a stock portfolio.  You can Google “OHFGX Oak Harvest” or find information on this new strategy of ours can be found at OakHarvestFunds.com.

From the whole team here, thank you and have a great weekend.