BOND AND STOCK MARKETS REACT POSITIVELY TO FED MOVE -- BOND YIELDS DROP -- NASDAQ 100 EXCEEDS APRIL HIGH -- SMALL CAP LEADERSHIP -- SUMMER RALLY IS DUE
FED FOLLOWS THE SCRIPT... The Fed followed through on the most advertised rate hike in history. First, by raising the Fed funds rate a quarter point to 1.25%. Second, by continuing to state that it planned to follow a measured pace in raising rates. The bond and stock market seem to be reassured by the Fed's action. Bond prices jumped and bond yields fell sharply after the Fed move. Chart 1 shows the 10-year T-note yield falling to the lowest level in a month and ending under its 50-day average. That's the first time its been under the 50-day line since early April when rates started to climb (see circles). That suggests to me that bond traders had already discounted the Fed's action and now believe that the recent runup in yields was overdone. Although the drop in bond yields caused some selling in the dollar, it gave a boost to the stock market. The drop in the dollar caused a bounce in gold and a 2% gain in gold stocks.
Chart 1
NASDAQ 100 BREAKS APRIL HIGH ... One of the day's positive technical developments was the ability of the Nasdaq 100 Index to rise above its April peak at 1508. Chart 2 shows the Nasdaq 100 Index breaking through the April barrier and reaching the highest level in four months. The rising relative strength line along the bottom of the chart shows the NDX outperforming the S&P 500. Historically, Nasdaq leadership is a good sign for the rest of the market. So is leadership by small cap stocks.
Chart 2
S&P SMALL CAP INDEX HITS RECORD HIGH ... Another positive sign for the stock market is leadership by small cap stocks. And that's what we've had for several weeks -- and again today. Chart 3 shows the S&P 600 Small Cap Index exceeding its April peak. That happens to also be a new record high for the small cap index. Its relative strength line has also hit a record high against the large cap S&P 500. The small cap Russell 2000 hasn't reached its April high yet. But it too is outperforming the S&P 500.
Chart 3
Chart 4
S&P 500 SPDRs CLIMB ON GOOD VOLUME... The S&P 500 SPDR didn't reach a new high today, but had a good day nonetheless. What was most impressive was the upside volume. The daily chart shows today's volume to be the heaviest in a month. That's a good sign. The 5-minute bars in Chart 6 also show that most of the upside volume came right after the Fed move around 2:15. There was another burst of upside volume around 3:30. Not only was the volume heavy, but most of it was to the upside. What we still need to see, however, is follow-through buying through the rest of week. A Friday close above 115 would be a good way to end the week. The traditional summer rally usually kicks in around July 4. With the Fed move out of the way, the market appears ready to resume the uptrend that started in mid-May -- with small caps and the Nasdaq leading the way.
Chart 5
Chart 6
SUMMER RALLY IS DUE...
