FEDERAL RESERVE MEETING SENDS MARKETS TO NEW HIGHS -- $$GDP AND EQUITY MARKET CORRELATIONS -- $COMPQ TRIES TO HOLD NEW HIGHS AFTER BREAKING OUT -- $INDU SURGES 100 POINTS -- $VIX MAKES FRESH 7-YEAR LOWS -- XLU AND XLP HAVE HUGE VOLUME SURGES

FEDERAL RESERVE MEETING SENDS MARKET TO NEW HIGHS... The equities market S&P 500 ($SPX) clearly liked the Fed announcement yesterday. It pushed the market back up above the highs of last week after some small range days Friday through to Tuesday. Sometimes the Fed day can be a climax top or bottom day. Our first look is at the S&P500 ($SPX) on Chart 1. The primary trend is intact and going higher at this point.

(click to view a live version of this chart)
Chart 1

In the year 2013 the June Fed meeting occurred during the pullback from the May highs as shown in Chart 2. It pushed the market down for four straight days into the June 24th low. That marked the end of the biggest pullback in 2013. That was 200 points ago on the S&P500 ($SPX). You may also notice the On Balance Volume (OBV) Indicator broke out to new highs on May 1, 2014 before the $SPX actually broke out of the trading range. This OBV trend continues higher on Yesterday's close.

(click to view a live version of this chart)
Chart 2

$$GDP AND EQUITY MARKET CORRELATIONS... The Federal Reserve downgraded growth targets for the year. Just doing some quick math suggests the Federal Reserve expects 3.2% GDP growth in the current quarter as well as the final 2 quarters to hit the low end of their target.

Chart 3

Source: Bureau of Economic Activity

While there is some correlation of the US GDP to the stock market, we can see by comparing Chart 4 to Chart 5 that the stimulus provided by the Fed has reduced the correlation to GDP changes Quarter over Quarter. You can see the negative quarters are shown in a different colour on this www.tradingeconomics.com graph.

(click to view a live version of this chart)
Chart 4

(click to view a live version of this chart)
Chart 5

Chart 6 is displaying the US GDP ($$GDP) by Quarter in Millions of Dollars. We use the closing date of the quarter for each datapoint, so the first quarter data point displays on January 1-March 31, 2014 just to ensure clarity.

(click to view a live version of this chart)
Chart 6

$COMPQ TRIES TO HOLD NEW HIGHS AFTER BREAKING OUT ... This morning the NASDAQ Composite ($COMPQ) broke out to new highs. We are currently testing the previous high of March 6, 2014 at 4371. This morning the market surged to 4372 and gently pulled back. How this major index behaves as we test the previous highs is always important, so we will watch closely for follow through.

(click to view a live version of this chart)
Chart 7

$INDU SURGES 100 POINTS... Dow Jones Industrial Average ($INDU) surged 100 points yesterday as shown in Chart 8 but couldn't quite take out the June 9 highs. At this point we are watching to see if it follows the $SPX higher or goes back to test close support at 16600.

(click to view a live version of this chart)
Chart 8

THE $VIX MAKES FRESH 7-YEAR LOWS... The Volatility Index ($VIX) made fresh seven-year lows on Wednesday going way back to 2007. You can also see on the plot in Chart 9 that when the $VIX MACD moved above zero in 2007 that was probably a time to be more cautious in the market. Throughout 2005 and 2006 the MACD had a positive slope higher. Currently we have a slight slope up from 2013 to 2014 on the MACD but it does not appear to be turning higher or breaking to the upside yet. You will notice the green arrow in the MACD window pointing to a negative number meaning the MACD line is still below the signal line.

(click to view a live version of this chart)
Chart 9

XLU AND XLP HAVE HUGE VOLUME SURGES... One of the sectors shown in Chart 10 that surged yesterday was the Utilities Sector SPDR (XLU). What is interesting is the volume was the highest it's been in a year and it surged on the Fed announcement of lower growth and continuing Fed tightening so that does point to caution for today's new highs.

(click to view a live version of this chart)
Chart 10

The Consumer Staples Sector SPDR (XLP) also broke out to new highs yesterday and again today while two other trends changed on the chart. The SCTR ranking shown on Chart 11, which had been declining, broke above its previous trend line at the top of the chart. The relative strength compared to the S&P 500 (XLP:$SPX) broke above the down sloping trend line. You can see that breaking out on the bottom plot area in purple. Both of these indicator trend lines breaking suggest new power for the Consumer Staples sector.

(click to view a live version of this chart)
Chart 11

A PAUSE TO CHECK FOR EUPHORIA IN INDICATORS... Not all indicator signals are urgent but the CBOE Equity Only Put/ Call Ratio ($CPCE) is an important one for sentiment. This compares the number of puts compared to the number of calls. First let me clarify the chart. Between the two lines, is a very normal level. We can "ignore" the information. When it reaches huge extremes outside the lines, we want to be focused on what the information is trying to tell us. I noticed in the last few days that it is at an extreme level of complacency. The $CPCE is currently down below 0.4, which is a single day level that has only been reached a handful of times in the last 10 years. You will also notice below is the 10 day exponential moving average shown in blue and that is way down to an extreme level that has only been seen five times in 10 years. It may or may not mark a top, but it does mark a level of unbridled enthusiasm, much like the currently $VIX reading mentioned above.

(click to view a live version of this chart)
Chart 12

On the following chart, the four major volume candles to the right of the blue lines occurred on the Equity Options Expiration day at the end of each quarter. With the options expiration for the second quarter showing up tomorrow, I can see a few reasons to expect a change in volatility. One of them will be the volume. It is important to note that the days highlighted with the arrows to the right of the vertical lines are simply pointing to extreme volume on QE days. The market direction and reaction does not have to change on this, but you can see it is a pivotal place for new positions.

(click to view a live version of this chart)
Chart 13

$GOLD AND $SILVER SURGE THROUGH RESISTANCE... The gold sector continued to move on Thursday as shown in Chart 14. The Gold Tracking ETF (GLD) broke out on Thursday above the down sloping trend line and made the move to higher ground on huge volume. The volume exceeded the 50 day moving average by the early morning and three hours in it was trading almost double the 50 DMA.

(click to view a live version of this chart)
Chart 14

$SILVER was not to be left out of the precious metals rally today. Silver ($SILVER) broke above the $20 level on Chart 15 and shot higher! We can see the pullbacks in Silver Tracking ETF (SLV) with very steep right side break outs shown on Chart 16. The base of $18.00 seems exceptionally strong and the surge was huge. Using the Silver Tracking ETF (SLV) we can see the big move today. Silver broke the trend line weeks ago, and has climbed almost every day off the June 1 lows.

(click to view a live version of this chart)
Chart 15

(click to view a live version of this chart)
Chart 16

To conclude, the recent surge in equity markets on the Fed lowering growth expectations while continuing to slow stimulus seems to be a paradoxical response. I am watching to see if the complacency in the Options market changes direction on the quarterly Options Expiration day tomorrow. The selling that is occurring in early trade today may be a hint of the complacency unwinding. Using the Nasdaq Composite ($COMPQ) as an important growth index indicator, the testing the previous highs this morning is very important on the intermediate picture. We need to see the $COMPQ break out and hold new highs next week. As the 'growth index' works to confirm a breakout to new highs with the backdrop of 'slowing growth' expectations, short term investors should watch closely to protect profits made off the February 5th lows if the market reverses and fails to hold this growth index test of the highs over the next few days. Longer term investors should not be impacted by the short term movements and the market made new highs this morning confirming their position.
Good trading,
Greg Schnell, CMT