U.S. markets were neutral for much of Wednesday’s action as Wall Street awaited the Fed’s latest decision on interest rates. The action afterwards was slightly bullish as the Fed left rates unchanged but dropped strong hints a cut could come as early as July.
The key takeaway from the policy statement is the Fed removed the word “patient” with Chairman Jerome Powell providing additional dovish comments that kept market momentum intact.
Volatility sank nearly 6% and is signaling lower lows with the market on the verge of all-time highs if the bullish story continues to play out.
The Nasdaq rose 0.4% after testing a late day high of 7,998. Fresh and lower resistance at 8,000-8,100 held on the 2nd-straight close above the 50-day moving average with the all-time high at 8,176.
The Russell 2000 also added 0.4% following the run to 1,556 while settling a point off the session high.
Prior resistance from early April at 1,560-1,575 held on the close back above the 200/50-day moving averages.
The S&P 500 was up 0.3% following the push to 2,931 and 2nd-straight close above the 2,900 level.
Lower resistance at 2,925-2,950 held for the 2nd-straight session with a close above the latter and the all-time high at 2,954 getting 2,975-3,000 in play.
The Dow gained 0.2% after tapping a session high of 26,569.
Fresh and lower resistance at 26,500-26,750 was cleared and held with a close above the latter getting 27,000 and the all-time high of 26,951 in focus.
Healthcare and Utilities showed the most sector strength after rising 0.9% and 0.8%, respectively.
Real Estate rose 0.7%.
Materials paced sector weakness after sliding 0.5% while Financials and Energy gave back 0.3% and 0.2%, respectively.
Global Economy – European markets were mixed on economic data that showed UK’s inflation rate cooled in May, with cost pressures in factories falling to a 3-year low.
The Belgium20 climbed 0.4% and France’s CAC 40 added 0.2%. UK’s FTSE 100 fell 0.5% and Germany’s DAX 30 slipped 0.2%.
The Stoxx 600 slipped less than a point.
UK consumer prices rose to an annual rate of 2% in May, matching expectations.
Asian markets rallied following President Trump’s tweet that he had a very good telephone conversation with Chinese President Xi Jinping, with a meeting between the two set to happen next week.
Hong Kong’s Hang Seng surged 2.6% and Japan’s Nikkei jumped 1.7%.
South Korea’s Kospi and Australia’s S&P/ASX 200 rallied 1.2% while China’s Shanghai soared 1%.
Japan exports sank 7.8% in May, worse than forecasts for a drop of 7.7%, and follows a 2.4% year-on-year decline in April.
MBA Mortgage Applications fell 3.4%, following the 26.8% surge the prior week.
The purchase index and the refinancing index each dropped 3.5% after respective gains of 10% and 46.5% previously.
The 30-year fixed rate inched up to 4.14% from 4.12% while the 5-year ARM also edged higher to 3.45% from 3.43%.
Market Sentiment – The FOMC left rates unchanged at 2.25%-2.5% but lost patience, dropping that characterization of the policy stance in favor of noting that uncertainties about this outlook have increased.
The statement also included Powell’s previous comment that the committee would closely monitor incoming information and will act as appropriate to sustain the expansion.
As for the labor market, the Fed said it remains strong and that economic activity is rising at a moderate rate.
The latter is a tad of a downgrade from the May 1st statement where the Fed noted activity rose at a solid rate. Additionally, the Fed noted that while household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft.
Concerning inflation, the Fed said market-based measures of inflation compensation have declined, a little more aggressive than the prior statement where the Fed said market-based measures of inflation compensation have remained low in recent months.
Overall, the policy statement was very close to market expectations with Fed James Bullard the only member to vote for a 25 basis point cut.
Meanwhile, the median dot shows no change in rates this year, but there was a split in the dots, with 8 FOMC members forecasting no change, with one looking for a tightening, while 1 member called for one 25 basis point easing, and 7 members forecasting two cuts.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 7th-straight session despite the intraday pullback to $131.58. Fresh support at $131.50-$131 held with backup help at $130.50-$130.
Lower resistance at $132.50-$133 was cleared and held on the rebound to $132.72 afterwards.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) was up for the 2nd-straight session after testing a late day high of $66.84.
Current and lower resistance at $67-$67.50 held with a continued closes above $68 and the 50/200-day moving averages being a more bullish signal.
Near-term support is at $66-$65.50. A close below the latter would be a bearish development with risk towards $63.50-$63 and late May lows.
RSI is in a slight uptrend with resistance at 60-65 and early May highs.
A move above the latter would be a bullish signal for additional strength towards 70-75 and mid-February peaks. Support is at 50-45 with a move below the latter signaling additional weakness.
The Spider Gold Shares (GLD) traded in negative territory throughout much of the session with the low tapping $126.70.
Near-term support at $126.75-$126.25 was breached but held. A close below $126 would be a slightly bearish development with additional weakness towards $125-$124.50.
The surge to $127.99 following the Fed news was the 2nd-straight 52-week peak.
Resistance from July 2016 is at $128.50-$129 on continued strength.
RSI is in a slight uptrend with resistance at 75.
A move above this level, and the high from earlier this month, would signal continued strength with upside potential towards 80-85 and March 2016 peaks. Support is at 70-65.
We are allocating the portfolio as follows:
30% in CERN closed on Wednesday at 71.00
30% in HAS closed on Wednesday at 107.33
30% in TTWO closed on Wednesday at 111.02
10% in TMF closed on Wednesday at 24.93
Option Traders – the following (regular monthly) options meet our criteria:
CERN – 20SEP $72.5 Strike Price CALL
HAS – 18OCT $110 Strike Price CALL
TTWO – 20SEP $115 Strike Price CALL
TMF – 15NOV $25 Strike Price CALL
All the best,
Roger Scott.