FED HIKES AS EXPECTED BUT SUGGESTS MORE TO COME IN 2017 -- BOND YIELDS CLIMB ALONG WITH THE DOLLAR -- GOLD AND RATE SENSITIVE STOCKS LOSE GROUND -- SO DO EMERGING MARKETS -- STOCK RALLY STALLS WHILE IN SHORT-TERM OVERBOUGHT CONDITION
FED OFFERS SLIGHTLY STEEPER PATH FOR 2017... The Fed surprised no one today one by raising short-term rates by a quarter of a point. It did, however, offer a steeper path for rate hikes in 2017. That may have caught more attention. Bond yields climbed which boosted bank stocks initially. Bond proxies like utilities weakened the most. The dollar rose with bond yields which pushed gold prices lower. Foreign stocks also weakened, with emerging markets suffering bigger losses. It's doubtful that today's Fed announcement will change any market trends currently in force. It may, however, lead to some short-term volatility. The stock rally appears to be stalling. That's not too surprising considering how far it's come over the last month. Chart 1 shows the 5-Year Treasury Yield climbing to the highest level in five years. Chart 2 shows the Dollar Index (UUP) drawing closer to another 14-year high. That combination is causing selling in emerging markets. Chart 3 shows Emerging Markets iShares (EEM) falling 2% after failing a test of its 50-day average. Some of that selling is spilling over into U.S. stocks.
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Chart 1
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Chart 2
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Chart 3
DOW AND S&P 500 LOOK STRETCHED... The post-election rally in the Dow and S&P 500 looks stretched. The red line line in Chart 4 shows the 14-day RSI for the Dow Industrial SPDR (DIA) peaking at a very overbought reading of 85. That could pave the way for a short-term pullback or consolidation. The top of Chart 5 of the S&P 500 SPDR (SPY) shows the slow stochastics oscillator forming a small double top while in overbought territory over 80. The SPY is also struggling to stay above its upper Bollinger Band. Chart 6 shows the Nasdaq 100 (QQQ) having just risen to a new record high and in a stronger technical condition. Some money has started moving back into larger tech stocks that have lagged behind since the election. The QQQ/SPX ratio (top of Chart 6) is starting to turn up. None of these short-term signals is enough to damage the market's overall uptrend. Any short term selling should also be countered by a positive seasonal trend for the balance of December. The market uptrend was due for a breather. The Fed may have provided an excuse for one. We'll let the dust settle for today and take a closer look at how things look tomorrow.
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Chart 4
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Chart 5
