FED TO END BOND PURCHASE PROGRAM - BONDS REMAIN RANGE BOUND - TECHS AND SMALL-CAPS LEAD STOCKS HIGHER - SETTING SHORT-TERM SUPPORT - ALL SECTORS PARTAKING IN BULL RUN - PROGRAMMING NOTE
FED LEAVES RATES UNCHANGED... Link for todays video.
With signs the economy is stabilizing, the FOMC voted to keep interest rates unchanged. This means the Fed Funds target rate remains 0-.25%. Moreover, the Fed suggested that rates could stay low for an extended period of time. The Fed also indicated that the bond purchase program would slow and ultimately end in October. The Fed first announced its $300 billion bond purchase program on March 18th, six months ago.
Chart 1
Chart 1 shows the Dollar Bullish ETF (UUP) plunging with the Fed announcement on March 18th (yellow highlight). Even though there was an oversold bounce into April, the downtrend continued as the Fed extended its bond purchase program. After all, the Fed was printing money to buy bonds and this diluted the value of existing Dollars. While the Dollar has yet to reverse its downtrend, an end to the bond purchase program could be bullish for the greenback. UUP surged last week and then consolidated this week. We have yet to see follow through to last weeks surge. A move above 24 would break the 50-day SMA, late July high and March trendline. Also notice that RSI is challenging 50 again. A surge above 60 in RSI would clearly turn momentum bullish. These are the levels to watch in the coming days.
Chart 2
For obvious reasons, a breakout in the Dollar would be negative for gold and oil. In addition, a strong Dollar could also have negative implications for stocks. Chart 2 shows the S&P 500 and the US Dollar Index over the last eight months. These two are clearly negatively correlated right now. The March bottom in stocks coincided with the March peak in the Dollar.
BONDS REACT TO FED... The 20+ Year Treasury ETF (TLT) was up in early trading, but fell after todays FOMC announcement. Chart 3 shows TLT surging with the March 18th announcement and then falling soon thereafter. Since the April-June decline, TLT has been consolidating with a triangle pattern. A break below 90 would be bearish, while a break above 95 would be bullish. Supply concerns remain as the Treasury issues record levels of debt. With the Fed announcing the end of its bond purchase program, demand for bonds could suffer. While these fundamental considerations are interesting to ponder, it is usually best to stick with the chart. The overall trend is down. A higher low could be forming, but a triangle breakout is needed to solidify support at 90 and show sustainable buying pressure.
Chart 3
STOCKS SURGE AND HOLD GAINS... With intraday volatility that is typical of Fed days, stocks moved higher on Wednesday with techs and small-caps leading the charge. The Nasdaq 100 ($NDX) was up around 1.5% and the Russell 2000 ($RUT) was up around 1.8%. With todays advances, the lows over the last two weeks become the first support levels to watch for signs of a pullback. We all know that stocks are overbought after sharp advances from July 7th until now. In the last five weeks, the Dow and Nasdaq are up over 14%, while the Russell 2000 is up over 19%. Despite being overbought, the major indices are remaining overbought as gains hold. Chart 4 shows the Nasdaq 100 surging off 1600 with a big move today. This move reinforces short-term support around 1590-1600. A break below this support level would argue for a correction. Until said support break, expect stocks to simply remain overbought and the trend to continue.
Chart 4
Chart 5 shows the Russell 2000 bouncing off support from last weeks lows. A break below first support at 555 would argue for a correction. For now, key support levels are based on the early July lows, which mark the last reaction low on the daily charts. The medium-term uptrend remains in place because downtrends start with lower lows (support breaks).
Chart 5
ALL SECTORS ABOARD... PerfChart 6 shows the absolute gain/loss for the nine sector SPDRs with the S&P 500. The S&P 500 tab is not highlighted and the red box is filled. On a live PerfChart, you can click on this tab and box to change the settings. The blue dotted line shows the performance of the S&P 500 for reference. Sectors above the line are outperforming, while sectors below the line are underperforming.
The latest advance in the stock market began around July 7th. Over the last five weeks, the S&P 500 is up over 12% and all sectors are participating. Such widespread participation is testament to the broadness of the current rally. The consumer discretionary, industrials, materials and finance sectors are leading. The technology sector (green) is lagging the S&P 500 somewhat, but it is still up 12% since July 7th. The defensive sectors are lagging because they are up less than the S&P 500. These include the utilities, consumer staples and healthcare sectors. When the market is playing offense, these defensive sectors usually underperform the broader market.
Chart 6
Chart 7
As suggested above, there are two ways to view this PerfChart. By clicking on the S&P 500 tab (now gray) and the red box (now hollow), this chart now shows relative performance instead of absolute performance. The S&P 500 is the zero line. Sectors in positive territory are outperforming the S&P 500, while sectors in negative territory are underperforming. Remember, on an absolute basis, all sectors are up since July 7th. However, some are up more than the S&P 500, some less. This PerfChart provides an easy means to define the leaders and the laggards. Relative weakness in technology is a concern, but this is offset by relative strength in the consumer discretionary, industrials and finance sectors.
PROGRAMMING NOTE... John Murphy is on vacation this week and will return next week. Market Message subscribers also have access to the commentary and videos at Arts Charts on Tuesday and Friday mornings.
