U.S. markets showed strength and traded to session highs ahead of Wednesday’s FOMC decision as the major indexes pushed prior resistance levels. As expected, the Fed raised interest rates by a quarter-point with the market weakening after the news.
The small-caps led the pullback but had traded mostly in the red throughout the session with the other major indexes failing to hold positive territory into the closing bell.
Volatility stayed relaxed but held key support levels as cautious trading continues to give a neutral reading for the market.
The Dow dipped 0.4% despite trading to an intraday high of 26,606.
Resistance at 26,600 held for the the 2nd-straight session with the close below the 26,400 level being a lightly bearish development.
The Nasdaq gave back 0.2% after making a second half run to 8,067.
Lower resistance at 8,075-8,100 held with the close back below the 8,000 being a cautious signal.
The S&P 500 was down 0.3% following the intraday test to 2,931.
Resistance at 2,920-2,925 held before the fade to support at 2,900 with the session low reaching 2,903.
The Russell 2000 sank 1% following the backtest to 1,690.
Near-term and lower support at 1,700-1,690 held on the close below the 50-day moving average and was a slightly bearish development.
Communication Services led sector strength after gaining 0.4%.
Healthcare and Consumer Discretionary added 0.2%.
Financial stumbled 1.2% to pace sector laggards. Real Estate and Energy tanked 1.1% and 1%, respectively.
Global Economy – European markets were mostly higher ahead of Italy’s budget proposal on Wednesday.
If the budget doesn’t adhere to EU standards, it could cause tension between the two sides.
France’s CAC 40 rose 0.6% and the Stoxx 600 Europe advanced 0.3%. Germany’s DAX 30 and UK’s FTSE 100 edged up 0.1%. The Belgium20 gave back 0.2%.
UK September CBI retailing reported sales fell 6 to 23, but better than expectations for a drop of 10 to 19.
Asian markets settled higher with South Korea’s Kospi remaining closed for a holiday.
Hong Kong’s Hang Seng jumped 1.2% and China’s Shanghai rallied 0.9%. Japan’s Nikkei added 0.4% and Australia’s S&P/ASX 200 climbed 0.1%.
China said it will cut import tariffs on nearly 1,600 kinds of goods starting November 1st and lower the overall tariff rate on the goods to 7.5% from 9.8%.
Japan August machine tool orders were revised downward to 5.1% year-over-year from the previously reported 5.3%.
Japanese Economy Minister Motegi and U.S.
Trade Representative Lighthizer agreed on the general direction of trade relations following bilateral trade talks.
MBA Mortgage Applications rose 2.9%, while the purchase index gained 2.6% and the refinancing index increased 3.2% in the week ending September 21st.
The average 30-year fixed mortgage rate surged 9 basis points to 4.97% and represents the highest level since April 2011.
New Home Sales bounced 3.5% to 629,000 in August, topping forecasts for a rise of 2.1%. Sales were mostly firmer regionally, with a 4.8% gain in the Northeast, a 9.1% jump in the West, and a 2.7% increase in the Midwest, while the South fell 1.7%.
The supply of homes dipped to 6.1 from 6.2 in July.
There were 318,000 homes for sale, the highest since early 2009, versus 313,000 previously. The median sales price fell to $320,200 from $328,100 with prices up 1.9% year-over-year versus 1.6% in July.
Market Sentiment – The Fed hiked the funds rate target 25 basis points from 2% to 2.25% with the dots showing another this year, and three in 2019, as was the case last quarter.
The Fed bumped up the neutral rate to 3%, from 2.875%.
The Fed removed the accommodative language, but said further gradual increases in the target range will be consistent with sustained expansion in activity.
The Fed said the labor market has continued to strengthen and economic activity has been rising at a strong rate.
Additionally, the meeting minutes noted household spending and business fixed investment had grown strongly.
Meanwhile, inflation remains near the Fed’s 2% target and indicators of longer-term inflation expectations are little changed, on balance. The policy vote was a unanimous 9-0.
Fed Chairman, Jerome Powell said the removal of the word accommodative was a sign policy is proceeding as expected.
He said the Fed does not consider political factors in decision-making.
Powell said the Fed is focused exclusively on carrying out its mission of achieving maximum employment in the context of price stability.
He said the Fed is not responsible for trade policies and analysts don’t comment on them, as he said the Fed has been hearing a lot about trade from regional contacts.
The Fed head went on to say it’s hard to see any impact of tariffs so far, at an aggregate level, although he is slightly worried on a longer-term basis. Powell said he believes the U.S. economy is in a particularly bright spot, but it’s too soon to see any supply side effects from tax reform.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 3-session slide after rebounding to test a high of $117.58.
Fresh and lower resistance at $117.50-$118 was cleared and held with a close above $118 being a more bullish development.
Support is trying to move up to $117-$116.50. The 50-day moving average has tagged the 200-day moving average to form the start of a death cross.
This is typically a bearish technical pattern for lower lows.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 3rd-straight session despite a run to $265.53. Fresh resistance at $265-$266 held.
The prior peak came at $265.90 and $265.93 in back-to-back sessions in late January. A close back above $266 keeps $267.50-$268 in play with last Friday’s all-time high at $267.61.
Near-term support is at $263-$262.50 on the tumble to $263.27 afterwards.
A close below the latter would be a slightly bearish development and represent early signs of a possible longer-term double-top from January.
RSI is in a downtrend with support at 60. A close below this level would lead to continued risk towards 55-50. Resistance is at 65.
The iShares PHLX Semiconductor ETF (SOXX) was weak for the 3rd-time in 4 sessions following the pullback to $183.
Near-term support at $183-$182.50 held with a close below the latter signaling additional weakness towards $181.50-$181 and the 200-day moving average.
Lowered resistance is at $183.50-$184 on the 2nd-straight close below the 50-day moving average.
RSI is in a downtrend with support is at 45-40 and the latter representing the monthly low. Resistance is at 50.
We are allocating the portfolio as follows:
30% in INTU closed on Wednesday at 222.18
30% in QCOM closed on Wednesday at 72.37
30% in AAP closed on Wednesday at 169.33
10% in TMF closed on Wednesday at 17.48
Option Traders.. the following (regular monthly) options meet our criteria:
INTU – JAN 230 CALLS (Expiration Date January 18, 2019)
QCOM – NOV 72.5 CALLS (Expiration Date November 16, 2018)
AAP – DEC 160 CALLS (Expiration Date December 21, 2018)
TMF – NOV 18 CALLS (Expiration Date November 16, 2018)
All the best,
Roger Scott.