The S&P 500 topped on October 29 and then pulled back as expectations for another rate cut at the December 10 FOMC meeting dimmed. In his statement before the press conference after the October 29 FOMC meeting, Chair Powell threw cold water on the prospects of a rate cut at the December meeting. “In the Committee’s discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it.” The probability of a December rate cut peaked on October 27 at 100% and then plunged to less than 60% after Chair Powell’s comment. After bouncing around 60% for 2 weeks, the probability fell below 30% after the minutes of the October 29 meeting were published on November 19.
The minutes from the FOMC October 29 meeting confirmed much of what was already known. There is a big divide between those on the FOMC that are reluctant to lower the Funds rate again due to concerns about inflation and those who are more worried about the labor market and favor another cut. “Participants expressed strongly differing views about what policy decision would most likely be appropriate at the committee’s December meeting.” The most important point in the minutes noted there were more members who didn’t want to cut than those who did. “Many” officials thought a rate cut wouldn’t be warranted in December—a group that outnumbered the “several” that thought a reduction “could well be appropriate.” In Fed speak ‘many’ means 8 or 9 members while ‘several’ means 5 or 6 members. The odds of cut dropped below 30% after the minutes were released.
The minutes added to the negativity in the market but all eyes were on Nvidia’s earnings report with hopes that a good report would make everything OK again. Nvidia delivered a great report but the reaction wasn’t positive as reviewed in the November 20 Special Update. “Nvidia reported a stellar quarter as revenues jumped by 66% from a year ago and Nvidia increased its guidance for the coming quarter. In the hours after the report Nvidia’s stock jumped from a close of $186.94 to $197.45. That strength carried over to this morning with Nvidia trading above $196.00. The overall market responded to Nvidia’s leadership with the S&P 500 up almost 2.0% at its high. After the first hour of trading, Nvidia’s stock began to slip and as it faded the S&P 500 reversed after being up 137 points. As Nvidia’s stock continued to slip, selling pressure in the overall market increased. In one-hour the S&P 500 shed 133 points and, after turning negative on the day, fell another 76 points. Nvidia traded under $180 before closing at $180.64.”
The strength and subsequent weakness in Nvidia helped create a 201 point range in the S&P 500.“On November 20, the S&P 500 spiked above the highs on November 18 and November 19 and fell below the lows of those days as well, which represents a Key Reversal. In addition, the S&P 500 closed below the important horizontal support at 6550. This suggests that the wave of selling that developed on November 20 will continue in the near term. Traders decided to sell into Nvidia’s good earnings and can be expected to sell more after such an ugly trading day.” To put the November 20th range in context, the S&P 500 hadn’t experienced a 3% correction since the low in April. On November 20 the S&P 500 fell -3.0% from its high in a matter of hours!
As noted in the November 20 Special Update, Nvidia was expected to set the table for the S&P 500. “The stock market will draw support or unleash more weakness depending on how Nvidia trades in the next few days. If Nvidia holds support above 176, a bounce will ensue that will lift the S&P 500. However, if Nvidia closes below 176 a decline to the next level of support is at 164 – 165. A decline below 164 would open the door for even more weakness. Nvidia has declined -15.0% in 16 trading days so it should bounce off the support at 176.”
In overnight trading on November 21 Nvidia traded down to $174.72 (below its support at 176), and the S&P 500 futures were down by -32.50 points, so additional selling was coming on the opening on November 21.
At 4:30 am on November 21 and 5 hours before the market’s open, New York Federal Reserve President John Williams gave a speech at the Central Bank of Chile Centennial Conference titled "Navigating Unpredictable Terrain.” In his speech, Williams explained why he wanted to lower the Funds rate in the near term. “My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat. Underlying inflation continues to trend downward, absent any evidence of second-round effects emanating from tariffs. I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.” In response to William’s speech, the S&P 500 futures rallied 152 points and the odds of a rate cut at the December meeting rocketed from less than 30% to 71%. Rather than opening down on November 21, the S&P 500 opened with a big gain as traders reacted to the prospect of a rate cut.
In last two weeks every voting member of the FOMC has given a speech and indicated whether they were in favor of a December rate cut or not. Four members have signaled they support a rate cut (Miran, Waller, Bowman, Williams) and 5 members said they didn’t want to cut in December (Barr, Musalem, Schmid, Goolsbee, Collins). Atlanta Fed President Jefferson said he wanted to ‘proceed slowly as we approach the neutral rate”, which sounds like he favors lowering the Funds rate but maybe not in December. Chair Powell has made no public comments since his October 29 press conference. Wall Street assumes that Williams’ view reflects Chair Powell’s position. Chair Powell endeavors to craft a consensus at each meeting after every member expresses their view, so Powell may have merely allowed Williams to express his opinion.
The President of the New York is first among the 12 districts Presidents since the NY Fed Presidentgets to vote at every FOMC meeting and President Williams is respected. The other 11 districtPresidents are rotated with 4 of them voting for one year. So, John Williams carries more weight, but he still only represents one vote, which is no more important than the 4 other District Presidents - Musalem, Schmid, Goolsbee, and Collins who don’t favor a cut. In a Q&A on November 20 Chicago Fed President Austan Goolsbee made a comment that may represent how a number of other voters feel. "But if I end up feeling strongly one way and it's different from what everybody else thinks, then that's what it is ... I don't think that there's anything wrong with dissenting." There were 2 dissents at the October 29 meeting (one wanted a 0.50% cut and one that didn’t want the 0.25% reduction), and it’s possible that there could be 3 or more dissents at the December 10 meeting, whether the FOMC cites to lower the Funds rate or not.
Wall Street has concluded that NY Fed President Williams support for a cut in December seals the deal. I don’t think it does since there are 5 voters who are likely to vote no. The FOMC is data dependent, but members won’t receive the November employment data and the November Consumer Price Index until after the December 10 meeting. Without new data to change minds, the views expressed in recent speeches aren’t likely to change, and there are more voters who don’t support a cut than do. If the FOMC doesn’t cut the Funds rate on December 10, the stock market won’t be happy.
Stocks
In recent Weekly Technical Reviews and the November Macro Tides I’ve discussed how extreme the market’s valuation has become relative to the last 100 years, and how dependent the market is on fewer than 10 stocks that comprise almost 40% of the S&P 500. The risk of a substantial decline is higher given valuations and such narrow leadership, once those 10 stocks experience a strong decline. History indicates that it’s not a question if only when the rug gets pulled.
Buried and unnoticed in the minutes of the FOMC meeting on October 29 was a reference to the stock market and potential weakness. “The minutes also highlighted a growing unease about frothy markets, with several officials flagging the risk of a “disorderly fall” in equity prices.” In the October Macro Tides, I discussed how the focus of monetary policy had changed when Ben Bernanke was the Chair of the Fed. “In the wake of the 2008 Financial Crisis, Monetary policy moved away from relying on the Federal Fund rate as its primary tool. Federal Reserve Chair Ben Bernanke confirmed the change in policy in an editorial in the Washington Post on November 4, 2010. Chair Bernanke wrote, “This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” For the first time in the history of the Federal Reserve, monetary policy was intentionally used to increase asset prices to spur economic growth.
Using monetary policy to goose stock prices is great on the way up, but a prolonged or disorderly fall could lead to less spending and a weaker economy. The Top 10% of wage earners are responsible for 50% of all consumer spending, so any meaningful reduction in spending by this cohort will hurt the economy. It would appear that some members of the FOMC are concerned about this prospect, and are likely in the group that is reluctant to lower the Funds rate in December.
Last week the range in the S&P 500 was significant. In the November 17 WTR, a rally to near 6780 was expected, but I also emphasized the importance of 6631. “As the S&P 500 was hitting its low on November 17, Ticks became as oversold as they did when the S&P 500 fell to 6551. The bottom panel is the RSI on the S&P 500 and it dipped below 30 on November 17, as it did when the S&P 500 traded down to 6551, 6631, and today’s low of 6639. This suggests the S&P 500 can be expected to bounce to near 6780 or modestly higher.” On November 20 the S&P 500 traded up to 6770.
The weakness last week was also note-worthy. “For the first time since the April low the S&P 500 failed to achieve a higher high, which further elevates the importance of 6631. A drop below 6631 would establish a lower high and lower low, and increase the odds the S&P 500 is in a downtrend.” The S&P 500 traded down to 6522 before rebounding after Williams’s speech.
Since September 10 the S&P 500 has only closed below the red horizontal trend line at 6575 twice – on October 10 (6552) and November 20 (6539). The S&P 500 quickly rebounded back above 6575 on October 13 and again on November 21. The next time the S&P 500 closes below 6575 it won’t rebound, so the third time won’t be a charm.
Cracks have appeared in the Artificial Intelligence narrative and Nvidia’s stock hasn’t responded much, even though the White House said it was considering allowing Nvidia selling GPU’s and chips to China on November 21. As noted last week, “Nvidia has declined -15.0% in 16 trading days so it should bounce off the support at 176.” From the high of 212.19 Nvidia fell 39.26. The 50% retracement of the decline would lift it to 192.56, the 61.8% retracement is 197.19, and the spike high after the earnings report was 196.00. It’s difficult to see the S&P 500 marching to a new high unless Nvidia is able to at least test 196 – 197.
The pattern in the S&P 500 is at a crossroad that could result in a new high above 6920 or a bounce that fails below 6869 before a drop below 6522 develops. The S&P 500 made a secondary high at 6869 before dropping to 6574. The rebound to 6770 (wave a) and drop to 6522 (wave b) could be part of an irregular b wave that could carry the S&P 500 briefly above 6770 (wave c). As long as the S&P 500 doesn’t trade above 6869, the bearish path is operative.
There is a possibility that the S&P 500 could rally to a higher high above 6920. An early sign that the S&P 500 is rallying to a new high would be indicated if the S&P 500 closes above the red down trend line near 6820.
There are other factors that could help the S&P 500 push above 6920. Concerns about the economy lifted after NY Fed President Williams’ speech. After closing below key support on November 20, the Russell 2000 rebounded strongly on November 21 and on November 24 with a gain of 4.8% from the November 20 close. The rush into the Russell 2000 reflects a belief that another rate cut will help the economy and small cap stocks in particular. The Russell 2000 will need to close above 2478 to indicate a higher high above 2541 is coming. It should be noted that more than 35% of the stocks in the Russell 2000 aren’t profitable, so the jump in the Russell 2000 is somewhat speculative.
Seasonality is favorable going into year end and most individual investors will be reluctant to sell winners before year end, so capital gains taxes can be postponed until April 2027. Institutional investors will also be reluctant sellers since they want to show they are exposed to the AI trade and its great promise. After year-end these positive dynamics will diminish. These are reasons why the market can hold up into early 2026 despite near term volatility, with the S&P 500 managing to rally above 6920. The next dose of volatility could come on December 10 if the FOMC doesn’t vote to lower the Funds rate.
A larger unwind in the Artificial Intelligence stocks is coming in 2026. A rally above 6920 is expected to set up a great selling and shorting opportunity.
Gold
The stock market isn’t the only market that benefitted from NY Fed Williams’ speech. In overnight trading on November 21, Gold traded down to 4025 before rallying to 4140 on November 24. Today’s move lifted Gold slightly above the November 19 high of 4132. Gold could rally a bit more before the short bounce is over, but it is not expected to rally above 4244.
As discussed previously, Gold is in the process of correcting the Wave 3 rally from the September 2022 low of 1616 to the October 2025 high of 4381. This correction is Wave 4 from the 2015 low of 1046 and will take months to complete. Gold is expected to ultimately decline to near 3325.
“Gold traded up to 4381 on October 20, so Wave 3 was $2765 (4381 – 1616 September 2022 Wave 2 low). A 23.6% retracement is $653 and the 38.2% is $1056 from the Wave 3 high of 4381. This generates targets of 3728 if Gold retraces 23.6% and 3325 if Gold retraces 38.2% of Wave 3. I think Gold will trade below 3750 in coming months. Chart wise the range between 3300 and 3500 is a target since the recent breakout occurred at 3403 and the April high was 3496.”
In the shorter term, the initial decline of 494 suggests Gold could trade down to 3750, which is just above the 23.6% target of 3728 (4244 – 494 = 3750). If Gold trades down to 3750 it will create a short term trading opportunity for another retracement rally.
Gold Stocks
After GDX plunged -16.95 (-19.9% in 7 trading days), GDX was expected to rally to the 61.8% retracement at 78.60, as noted in the November 3 WTR. “If Gold pushes a bit higher (above its 61.8% retracement target of 4192), GDX might be able to reach 78.60.” Gold did exceed the 61.8% retracement (4244 vs. 4192 target) and GDX popped to 79.97 on October 12. I noted that the rebound was another opportunity to lighten up as a rally above 85.08 was not expected. After reaching 79.97 GDX quickly dropped to 72.45 a decline of -9.4%. The drop to 72.45 was 3 waves (a-b-c), so GDX could briefly push above 79.97 before the next decline takes hold.
The Wave 4 correction in Gold is expected to last for months and GDX can be expected to follow Gold. GDX rallied from 40.26 to 85.08 after bottoming in April. If GDX retraces 38.2% of the 44.82 rally, GDX would fall to 67.96, which it effectively did after dropping to 68.13 on October 27. The swiftness and depth of the drop from the high suggests GDX has the potential to retrace 50% of the rally. That provides a target of 62.67. As Gold works through its Wave 4 correction, there will be sharp rallies that will provide trading opportunities in GDX. If Gold drops to 3750 GDX is expected to decline below 68.13 before the next trading opportunity develops.
Dollar
This has become the Dollar’s mantra since early August. “The Dollar needs to close above 100.25 to provide more confirmation that the low at 96.21 is in place.” On an intra-day basis, the Dollar traded up to 100.36 on November 5 and 100.39 on November 21. Despite the NY Fed Williams’ Dovish view and support of a cut at the December meeting, the Dollar didn’t weaken meaningfully. This suggests there is a bid underneath supporting the Dollar irrespective the ‘Dovish news’. The Dollar’s RSI recorded a lower reading as it rallied to 100.39 so a pullback in the near term seems likely. The 50% retracement of the rally from 96.21 to 100.39 is 98.30, which is just above the intra-day low of 98.03 on October 17. I think the Dollar has been building a base since it fell to 96.37 in June, and will rally to 104 to 106 after it breaks out above 100.25.
I think markets have over reacted to NY Fed Williams’ speech and are now depending on the FOMC to cut the Funds rate at the December meeting. It will be a close call but I think it’s more likely the FOMC won’t lower the Funds rate in December. If this proves correct, it could provide the juice the Dollar needs to close above 100.25.
Treasury yields
The 10-year Treasury yield increased in 5 waves as the yield moved up from 3.947% to 4.161%.
As I highlighted in the November 10 WTR, TLT declined in 5 waves in price.
These 5 wave moves up in Treasury yields and 5 wave decline in price (TLT) increase the odds that the trend in Treasury yields is up. A close above 4.20% will provide more confirmation that the trend in Treasury yields is up, and will likely be followed by a quick move up to at least 4.351%. A close below 88.40 on TLT will indicate additional weakness is coming. The move higher in Treasury yields will be delayed if the 10-year drops below 3.947%.
Major Trend Indicator
The Major Trend Indicator has been indicating that a decline of more than -7% wasn’t likely and that’s been the case. However, although the MTI is above the blue horizontal line, the gap has narrowed. It wouldn’t take much additional weakness to push the MTI below the blue horizontal line. If the MTI falls below the blue horizontal line the odds will increase that the S&P 500 will decline below 6575 and signal the onset of an intermediate decline. I think that’s coming in 2026.
Bear market declines in 2022 and 2025 didn’t occur until after the MTI fell below the blue horizontal blue line, and a good reason to sell materialized. In 2022 it was FOMC aggressive rate increases and a huge increase in reciprocal tariffs in 2025. In 2026 the reason will likely be a reckoning between the enormous spending on AI and a realistic assessment of investment returns as discussed in the November Macro Tides. “Revenues will have to grow so much in the next few years to justify all the spending on AI that a valuation hangover seems unavoidable. I have no idea if the coming AI hangover will mimic the Dot.com and fiber optic wipeout, or merely be a take two aspirin and an Alka Selzer type of hangover. What I am confident about is that at some point investors will realize that a gap exists between where the AI stocks are trading and an economic reality that is less than all the hype currently accepted without question. It’s not if, but when AI companies and investors experience Déjà vu all over again.”
The Daily Shot A number of charts in this letter were from The Daily Shot.
