'Three steps and a stumble' feared after US Fed raises rates - March 12, 2017
Although US Fed chief Janet Yellen has moved very slowly in raising rates, and has gone out of her way to prepare markets for the inevitability of higher rates, some analysts are warn that the old market adage of "three steps and a stumble" – which predicts a US share market selloff after three Fed rate hikes – is likely to hold sway. And this could have extremely important consequences for the behavior of US consumers, who have been comforted by the rise in value of their homes and share portfolios, and have continued to spend briskly even though they have yet to to enjoy a strong lift in real (inflation-adjusted) wages.
Three steps and stumble rule
The principle that security prices will decline following three consecutive increases by the in the discount rate it charges commercial banks. The rule stems from the negative effect rising interest rates have on security prices.
The overall downtrend could be large and quite fast. My 8 month old forecast has the downtrend going back down to around 2150 or even 2000 points:
But with so many bulls in the market and overall improving economic data during the last months I currently think the pullback ends around 2300 points or even higher earlier as my best case scenario. Worst case this turns into a larger crash which will end down further and later around 2100 points.
Short entry: 2360-2375
Stop loss: 2390
Risk: 15-30 points
Reward: 60-150 point
P.S. I mentioned the downtrend risk already as a warning in the comments of my previous chart '"Phase III" Of The Trump Rally' 21 days ago (on February 28, which was one day before the "S&P 500"peak at 2400 points). Since then I was waiting for even more confirmation by the price action that a market top has been reached, which is now the case on March 21, 2017.