FED STANDS PAT -- RATES JUMP AND BONDS SLIP -- DOW REMAINS OVERBOUGHT -- SEMIS CONTINUE TO LEAD TECH -- INTEL RECORDS 52-WEEK HIGH -- TEXAS INSTRUMENTS BREAKS RESISTANCE -- MAXIM COULD BE NEXT -- COAL STOCKS SHINE TOO
NO SURPRISES AT THE FED ... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The Fed gave the markets what they expected and left the Fed Funds rate unchanged at 5.25%. The Fed statement was also pretty much the same with references to moderate economic growth, a slow down in housing and inflationary pressures. The Fed remained adamant about inflation and stated that controlling inflation was the top priority. The 10-year T-Note Yield ($TNX) found support near the 50-day simple moving average over the last few weeks and surged off this support level today. A break above last week's high would be bullish for rates and target a move towards the January high around 4.9%. Even though a rise in rates seems bearish for stocks, it appears that stocks are not that worried about rates right now.
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BONDS UNDER PRESSURE... The Fed statement weighed on bonds, which loathe inflation and move opposite of interest rates. Bonds were hoping for more dovish rhetoric in the FOMC policy statement. After opening strong and closing weak on Tuesday, the iShares ~20-year T-Bond Fund (TLT) fell further on Wednesday and the pattern over the last few weeks looks like a rising wedge. Even though the wedge is still rising and the 3-4 week trend is up, wedges are typical for counter trend rallies and a break below the late April low would be bearish. This would signal a continuation of the March decline and target a move towards support around 84.5-85. A fall in bond would mean a rise in rates.
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DOW HOLDS ITS GAINS AFTER THE FED ... The Dow Industrials moved to another new all time high after the Fed announcement. The Dow remains overbought and strong at the same time. The trendline extending up from the March low is extremely steep, but it is holding and there are no signs of weakness. This is a classic example of a security becoming overbought and remaining overbought. RSI moved above 70 on 19-April and above 80 today. The indicator was last above 80 in October 2006. While the move above 80 did not mark the top in October, it did foreshadow a slowing of the advance. The Dow continued higher from November to February, but the ascent was less steep. Even though RSI formed negative divergences during these months, it held above 50 for the most part and this defined the uptrend. There was a brief dip below 50 in late November and then a sharp decline below 50 in February. RSI (momentum) favors the bulls as long as it holds above 50 and this level acts as support in an uptrend.
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SEMIS LEAD THE TECH SECTOR... The Semiconductor HOLDRS (SMH) surged over 2% on Wednesday and this key tech group continues to show leadership. The ETF broke consolidation resistance with a surge in mid April and then consolidated the last two weeks. Today's surge pushed SMH above consolidation resistance and renewed the advance. The weekly chart shows resistance around 39-40 from the January 2006 high and this is the next target for SMH.
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INTEL RECORDS 52-WEEK HIGH ... Intel (INTC) is the single biggest component in the Semiconductor HOLDRS (SMH) and this key stock broke to a new 52-week high. It all started with a gap up on April 9th and the stock surged to resistance around 22. INTC consolidate for a couple weeks and surged above resistance today. A new high for Intel bodes well for the Semiconductors and this in turn bodes well for the Nasdaq.
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TEXAS INSTRUMENTS ALSO BREAKS OUT... Texas Instruments (TXN) surged over 4% today and was the second most active stock on the big board. Yes, even the NYSE has a few big tech names. The stock was range bound from October 2005 until April 2007. Today's surge broke range resistance and the stock also recorded a 52-week high.
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MAXIM COULD BE THE NEXT BREAKOUT... Maxim Integrated Products (MXIM) is also part of the Semiconductor HOLDRS (SMH), but the stock remains short of a breakout and is currently lagging the ETF. However, MXIM does show some promise after a high volume surge in mid April. A consolidation followed over the next two weeks and MXIM established resistance at 34. Follow through with a break above this level would be most bullish for the stock.
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DON'T FORGET COAL ... Semis may be exotic, but coal stocks are also shining today. The Dow Jones Coal Index ($DJUSCL) was up over 3.5% and has shown good relative strength the last few weeks. The Coal Industry is part of the Materials sector and this sector has also been red hot over the last two months. On the price chart, the Coal Index broke above the 200-day SMA in early April and exceeded its December high later that the month. The 50-day day SMA also crossed above the 200-day SMA for a golden cross in April and coal stocks continue to heat up.
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SOME COAL LEADERS... Unsurprisingly, we are also seeing a number of breakouts within the coal group. Westmoreland Coal (WLB) broke resistance at 24 in late April and forged a 52-week high in the process. The stock consolidated for two weeks and then broke to another 52-week high over the last two days with good upside volume. Arch Coal (ACI) broke out in April and then consolidated. The stock broke above consolidation resistance today to signal a continuation of the uptrend. And finally, Peabody (BTU) broke above consolidation resistance with above average volume and it is clear that something is up in the coal group.
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