Hasn't the Market factored in Key Monetary Policy and Economic Data Due this Week???

"Many traders fail because they've focused on what the market should be doing, rather than on what it is doing. The stock market leads, not follows, economic fundamentals." from Brett Steenbarger.

"Dramatic news can affect market prices for a few minutes or a day because they temporarily trigger emotional reactions. But news, no matter how dramatic doesn't change social mood. Even if you knew every news event in advance, you couldn't predict the stock market. This is a counter-intuitive claim, because we hear about supposed news causality all day long on financial TV and in newspapers." from Robert Prechter, Jr.

I like to start my article "Hasn't the Market factored in Key Monetary Policy and Economic Data Due this Week???" with these two nice quotes from two respected analyst. Let us observe how cross markets (from currency to bonds to commodities to stocks) behaved weeks or a day before key monetary policy decision from FED and key US economic data from GDP to non-farm payrolls (due within the week).


FED Funds Rate History






Last 2001 recession, FED brought down interest rates from 6.50% to 1.00% (5.00% in 31 months); interestingly, in recent rate cut cycle FED brought down interest rates from 5.25% to 2.25% (3.00% in a span of 7 months only), considering there are still on-going debate whether the US is in recession or will tilt into a mild recession.


Cross Markets Behavior
Before the FED Rate Decision Tomorrow


2yr Treasury Yields spiked up and is currently testing important key resistance (2004 troughs), this resistance was a key consolidation areas prior to its' strong uptrend last 2004 to 2006; suffice to say this level is quite a strong resistance and a good and successful break-out from this level will gives more strength to its' next rally. However, the short term T-Notes may pause and move sideways at this level for a while much like it did 2nd half of 2003 to early part of 2004, because precedent FED action after bringing down rates to 1.00% kept rate unchanged for a year before they start its' rate hike cycle.







US Dollar bullishly broke-out from a month consolidation and comfortably stayed above consolidation resistance turned support (role reversal) a day before FED meeting and appears to have formed a bullish flag or pennant pattern awaiting FED to pull the trigger for a potential break-out.






On the other hand, strength in the greenback resulted to weakness in the commodity realm. A day before the FED meeting, CRB index formed a bearish engulfing candlestick pattern (but note that the negative divergence in its RSI had long been developed weeks ahead of the FED meeting).






Dow Jones Index' paused above 12,700 after its' month long rally, consolidation at this level is good for the market as the index take time out to construct a base foundation for its' next rise; consequently, this level will provide a key support point for any future pull back or downtrend.







Interestingly, in the equity market realm, it was the Nasdaq Composite (dominated by tech stocks) that is upholding Wall Street at current levels; the successful break-out from its' inverted head & shouldern reversal pattern was confirmed by several re-test of its' neckline.







On my recent Cross Markets article updates (4/27/08), I noted the missing link for the equity market to take it to the next level which is a significant drop in the commodity; we saw light crude oil and gold sharp dived yesterday on US Dollar strength, this only supported Brett's theory that stock markets leads (may i add financial markets leads), not follows, economic fundamentals.