U.S. markets traded in positive territory during the first half of Wednesday”s action but in a tight range ahead of the Fed minutes. The indexes gained strength heading into the news and traded significantly higher following dovish statements made by the Fed.
However, volatility returned as the major indexes gave up their gains to finish mostly in the red.
The Dow declined 0.7% after testing an intraday peak of 25,267 before closing below the 25,000 for the second-straight session.
The S&P 500 slipped 0.6% after racing to a high of 2,747 and was able to hold the 2,700 level for the fourth-straight session despite the late day weakness.
The Nasdaq dipped 0.2% despite testing an intraday high of 7,338 to extend its losing streak to 3-straight sessions.
The index has been holding the 7,200 level for 4-straight sessions and is just over 1% above its 50-day moving average.
Bucking the trend was the Russell 2000 after rose 0.1% while trading to a high of 1,555. However, resistance at 1,550 and the 50-day moving average continues to be a stickler and levels that failed to hold i to the closing bell.
Financials and Industrials showed some strength with the sectors gaining 0.1% and 0.03%.
Real Estate and Energy led sector laggards after falling 1.8% and 1.7%, respectively. Utilities and Consumer Staples sank 1.3% and 1.2%.
Global Economy – European markets closed mostly higher despite disappointing economic news and underwhelming earnings. UK’s FTSE 100 rose 0.5% and the Belgium20 was higher by 0.3%.
The Stoxx Europe 600 and France’s CAC 40 climbed 0.2% while Germany’s DAX 30 gave back 0.1%.
German February Markit/BME manufacturing PMI fell 0.8 to 60.3, weaker than expectations for a drop of 0.6. The February Markit services PMI declined 2 to 55.3, weaker than expectations for a dip of -0.3 to 57.
The Eurozone February Markit manufacturing PMI declined 1.1 to 58.5, below forecasts for a fall of 0.4 to 59.2.
The February Markit composite PMI fell 1.3 to 57.5, weaker than expectations of for a print of 58.4.
Asian markets rebounded from the prior session pullback and were led by Hong Kong’s Hang Seng after the index zoomed 1.8%. South Korea’s Kospi advanced 0.6% and Japan’s Nikkei added 0.2%. Australia’s S&P/ASX 200 rose 0.1%.
China’s Shanghai remained closed for the Lunar New Year holiday.
MBA Mortgage Applications sank 6.6%, along with a 6.2% slide in the purchase index and a 7.1% slump in the refinancing index for the week ending February 16th.
The average 30-year fixed mortgage rate rose 7 basis points to 4.64% to the highest level since January 2014.
U.S. chain store sales fell 0.6% to 115.8 in the week ending February 17th. The 12-month pace of sales rose to a 2.1% year-over-year clip compared to the same week in 2017, versus 1.6% previously.
February PMI Composite Flash rose 0.4 points to 55.9, topping expectations for a print of 55. The flash services index jumped 2.6 points, also to a reading of 55.9, and ahead of forecasts of 54.
Existing home sales fell 3.2% to a 5.38 million unit rate versus forecasts for a 5.65 million unit rate.
Minutes from the last Federal Reserve showed U.S. economic projections were stronger than forecast at the time of their December meeting. Real GDP from 4Q of last year was also ahead of expectations, as gains in both household and business spending were larger than anticipated.
Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar.
The Fed said real GDP was projected to increase at a somewhat faster pace than potential output through 2020.
The believe that the recently enacted tax cuts would boost real GDP growth moderately over the medium term.
As far as the unemployment rate, the Fed projected a further decline over the next few years as it continues to run well below their estimate of the longer-run natural rate over this period.
Market Sentiment – Dallas Fed Kaplan said the Fed should hike rates gradually and patiently this year, but waiting too long would increase the likelihood of recession.
He sees GDP growth of 2.50-2.75% and unemployment falling to 3.6% by yearend, while making progress toward the 2% inflation goal.
Kaplan also expects the growth boost from the tax cuts to fade in 2019-20, while arguing that it would be preferable to moderate debt/GDP growth at this point in the economic cycle.
He warned that the U.S. should be actively seeking ways to reduce growth of government debt.
Philly Fed’s Harker has penciled in two rate hikes are likely appropriate this year, forecasting growth of 2.5% this near and 2.0% next.
He sees unemployment sinking to 3.6% by mid-2019, then edging up, while inflation should reach or exceed its 2% target by the end of 2019.
Harker went on to say a trade war would not be good for the U.S. economy, and he would have to think long and hard about the the pros and cons of raising the inflation target.
He said he is in no rush to make changes to the Fed’s strategy framework, though it would probably not require a legislative change.
Fed’s Kashkari was quoted as saying Wall Street reacts to everything and that analysts don’t want to overreact to one-month data on wages and CPI. He suggested the markets were overly excited after the average hourly earnings number and stressed analysts can’t make policy on market blips.
On the Fed policy statement, he said analysts debate every word change in the statement and the inclusion of the word further in January signaled that the Fed was continuing the path it was on.
Analysts do care about financial stability, he said, but added analysts are not targeting currencies.
Karshari also remarked he believes there is still some slack in the labor market and thinks more prime-age workers could rejoin. He said the rise in yields reflects optimism on the economy, the balance sheet unwind, and supply.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the second-straight session after tumbling to an intraday low of $116.51. Backup support at $116.50-$116 held along with the 52-week low of $116.49.
Lowered resistance is at $117-$117.50.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) $134.48 traded higher for the 7th time in 8 sessions after peaking at $134.48 intraday.
Near-term resistance at $134-$134.50 held into the closing bell with a move above the latter being a continued bullish development. Support at $133-$132.50 held on the fade to $132.62 with a close below $132 signaling a possible backtest towards $130.
RSI is trying to hold short-term support at 50 with continued closes above this level being bullish for a possible run towards 55-60.
Support is at 40 on a close back below 50.
The Dow Jones Transportation Average ($TRAN) traded up 10,560 with short-term resistance at 10,600 holding. Continued closes above this level gets 10,750-10,800 and the 50-day moving average in play.
Support is at 10,350-10,300 with a move below 10,200 being a bearish development.
RSI is trying to hold near-term support at 40 with risk to 30 on a move back below this level. Resistance is at 50.
Existing Position Update
Stocks are rising once again and both of our positions are becoming increasingly profitable.
The giveaway was rising tech yesterday, even though blue chips were soft – techs usually lead during minor recover – since they are more speculative.
I’m hoping that the market will rise quicker – giving us opportunity to turn the APPLE into an iron condor spread.
I’m looking at several other opportunities and should have another set up before the end of the week. Volatility remains above fair value and I want to capitalize on that before it fades.