Equities were expecting more from the Fed. The resultant sell-off means recent high could represent significant tops, reports Jeff Greenblatt.

The Federal Reserve’s Open Markets Committee (FOMC) lowered the Fed funds rate 25 basis points yesterday and the market fell anyway. Some pundits were hoping for 50 basis points. Does a quarter point make that much of a difference? I’m not in the business of making predictions, but I’m not at all surprised the market sold on a rate cut. The Fed also announced it would stop letting it bond holding roll off (so called Quantitative Tightening) on Aug1 instead of in late September, which is probably more significant. I’ve discussed one of my war stories of being short the first trading day of the year in 2001 when Greenspan cut rates unexpectedly in between Fed meetings. Yes, the short covering shot the market sky high, but within a couple of weeks the whole thing was retraced back down.

This was before 9/11 and it was at a time when people hadn’t even acknowledged a major recession. Since sentiment shifted after the June meeting for a July rate cut, I’ve also told you I didn’t think any rate cut would help. It won’t. Second quarter GDP came in at 2.1% as business investment contracted for the first time in over three years. We continue to hear this is one of the greatest economies in history. If that i really the case, why cut at all?

According to last Friday’s New York Post, the Fed funds effective rate is 2.4% ,which is historically low compared to the long term average of 4.79%. A good economy should be able to absorb low rates. At one point the Dow was down near 400, not a good sign. To me, the most important aspect of Fed Chair Jerome Powell’s press conference is when he said the Fed has no experience managing trade tensions.

Given that President Trump said on Tuesday that the Chinese didn’t keep their promise concering buying agricultural products, that can’t be a good sign. According to a News.com.au story from July 31, with Chinese troops massing along the Hong Kong border, the situation is likely to get more serious before it gets better. Where there is an escalation of geopolitical risk, all the interest rate cuts in the world will not help.

So last week we talked about time windows. For now, tech has peaked right on day 987 from the August 2015 low despite great earnings reports from Google (GOOG) and Apple (AAPL). If AAPL didn’t do so wellTuesday night the Dow would’ve been down a lot more. As it turned out, AAPL put in a near-term high wave candle, which negated the big gap up which is a loss of conviction while tech moved further from the high. It’s too early to talk about a topping market but it’s safe to say the initial reaction to Fed was not promising. Now its not likely the President will be able to talk the market higher on an optimistic trade outcome with China. Should we attempt to thread the needle and suggest now that trade talks don’t appear as promising it would embolden the Chinese to crack down on Hong Kong?

War gaming an actual outcome is beyond our job description but it’s probably safe to say that if the turbulence on the Hong Kong border continues to escalate, the market is going to take a mighty drop.

Dollar Holds Up

A quick word on the U.S. dollar. It overcame an incredibly good Kairos reading. That happens from time to time. Kairos readings are high probability reaction points and when we get a non-event like this it usually means something a lot bigger is going the other way. A week later the U.S. dollar is a lot higher.

We are still in time window season which extends through Labor Day. The crowd didn’t react well to a quarter point cut, the first in a long time. It is probably more accurate to say the crowd was disappointed when Chair Jerome Powell failed to assure traders that there would be additional cuts later this year. In the near term the equity indexes larger time windows are active which means one or more charts do have the possibility of topping right here (see Nasdaq chart below). We are also on the other side of the four-year presidential cycle with the weakest month of the year looming only four weeks away. Additionally, with Google reacting the way it did, the feeling was the market was going to continue going up and never come back down which materialized right on the time window.

nasdaq 100

While this is not yet what we should call a toxic brew or a perfect storm, it’s likely time to turn somewhat defensive and protect gains made this year if not the past three years. What does this cut mean? As I said, a really good economy with the stock market near all time highs does not need a rate cut.