Stocks Bounce Ahead of Fed Meeting
The market tried to bounce last week but the tape remains very split. The market sold off hard on Friday 9/9/16 after one of the Fed officials made the case to raise rates at its meeting next week. He was dovish (wants low rates) and the fact that he turned a little hawkish (wants higher rates) spooked investors. After the market sold off hard, another Fed official came out on Monday (the very next trading day) and made the exact opposite case for the Fed not to raise rates. On cue, stocks soared on Monday as fear of an imminent rate hike waned. Volatility picked up over the next few days but the bulls emerged victorious for the week after the latest round of economic data largely missed estimates and that strengthened the dovish argument.
Technically, we are back in the tale of two tapes (very split tape) environment because a small group of stocks are acting well while several other areas of the market are in trouble. The Nasdaq Composite, Nasdaq 100, Semiconductors and a few other areas act well while the Dow & S&P 500 are still below their respective 50 DMA lines. We suspect the Fed threw out a trial balloon to see if the market was ready for another rate hike. Clearly, the market is not, and, we reiterate, we do not think the Fed will raise rates on Wednesday.
A Closer Look at What Happened Last Week…
Stocks opened lower and closed higher after buyers showed up after a few Fed heads came out on Monday and hinted at a dovish stance. The big news came from Fed’s Brainard after she said it would be prudent to wait for a while before raising rates. She made the case that the “data” does not support another rate hike just yet.
Separately, two other Fed heads also came out and back-pedaled helping stocks rally after Friday’s steep sell-off. Stocks fell hard on Tuesday, giving back Monday’s rally, alongside other so-called “risk-on” markets. Oil prices plunged after the International Energy Agency (IEA) reduced their outlook for oil in 2017. The IEA said the global economy is slowing down due to lackluster demand and supply remains very strong. That is a perfect recipe for lower prices. The IEA said the oil market will remain oversupplied for the first half of 2017.
Stocks opened higher but closed mostly lower on Wednesday as oil prices fell another 3%. Economic data was relatively light. Import prices fell -0.2% last month and economists were expecting a decline of -0.1%. Over the past year, import prices slid -2.2%, which was the smallest decline since October 2014. In other news, shares of Apple Inc. (AAPL) broke out and hit a fresh 2016 high after optimism spread regarding the new iPhone.
Thur & Fri Action:
Stocks were quiet on Thursday as investors digested a volatile week on Wall Street and the latest round of mostly disappointing economic data. The big miss came from retail sales, they fell -0.3% last month, missing estimates for an unchanged reading. Elsewhere, Jobless Claims came in at 260k, lower than the Street’s estimate for 265k. The Producer Price Index (PPI) came in flat which was slightly lower than the Street’s estimate for a gain of 0.1%. This suggests inflation still remains at bay. Industrial Production came in at -0.4%, missing estimates for a decline of -0.2%. The Empire State Manufacturing Survey slid to -1.99, missing estimates for -1.00. The Current Account was -$119.9B, slightly better than the $122.8B forecast. On a more positive note, the Philly Fed Business Outlook Survey jumped to 12.8, beating estimates for 2.0. Stocks fell after CPI edged higher and beat estimates.
Market Outlook: Split Tape
The tape remains very split. The fundamental driver continues to be easy money from global central banks. Economic and earnings data remain mixed at best which means easy money is here to stay. As always, keep your losses small and never argue with the tape.