Stocks ended mixed last week after the Fed raised rates for the second time in a decade and geo-political tensions flared up between the U.S. and China. Overall, stocks remain very strong and it is perfectly normal to see the market pullback and digest the recent and robust post-election melt-up. Not surprisingly, the areas that led on the way up since the election mostly fell last week including Financials, Steel, Materials, Industrials, and Transports to name a few.
The Nasdaq 100 ($QQQ) broke out on Tuesday, then negated its latest breakout by Friday. At this point, the market is very extended to the upside and it would be perfectly normal to see the major indices pullback a bit to digest the recent move. Also, it is important to keep in mind, we are entering the last two weeks of the year which are a seasonally strong period for stocks. Remember, last year, the Fed raised rates in mid-December, then stocks moved sideways for the last two weeks of the year, then plunged in January-February. In the short term, most indicators show the major indices are very extended/overbought so patience is king at this point.
A Closer Look at What Happened Last Week…
Mon-Wed Action:
Stocks ended mixed on Monday as investors digested the recent rally and the news that broke over the weekend about OPEC and Non OPEC members reaching a deal to cut production. Oil producers around the globe reached a deal to cut production by 1.2 million barrels and this was their first major agreement to cut production since 2001. Oil opened higher but sold off and closed in the lower half of its range on a daily basis. Could be a classic case of buy the rumor and sell the fact.
Stocks rallied nicely on Tuesday as the Fed began its 2-day meeting. The Dow came with a few points of hitting 20,000 and just broke above 19k, less than a month ago. Big cap tech made a come back, helping the tech-heavy Nasdaq 100 to breakout of a big base on hit new highs. Since the election, tech stocks have largely lagged so it is very encouraging for the bulls to see them kick back into gear.
Stocks fell on Wednesday after the Fed raised rates for the second time in a decade. The Fed raised rates by a quarter point and raised their target to 0.5-0.75%. This was the first rate hike in a year and the second in a decade. The Fed said it wants to raise rates 3 times in 2017 but of course that can change. Last year, they said they were going to raise rates 4 times in 2016, and they only raised rates 1 time this year. Yellen also left the door open and said monetary policy is not on a preset course. Separately, retail sales missed estimates and a slew of big tech leaders met with President-Elect Trump.
Thur & Fri Action:
Stocks rallied on Thursday as buyers showed up one day after the Fed raised rates for the second time in a decade. The US dollar surged to a 14-year high as investors believe the Fed will raise rates more aggressively in 2017. In economic news, CPI (Consumer Price Index) increased by +0.2% last month which matched estimates. Elsewhere, weekly jobless claims came in at 254,000. The Philadelphia Fed business index rose to 21.5 beating November’s reading of +7.6. Finally, the Empire State manufacturing index increased to 9.0 in December from 1.5 in November.
Stocks edged higher on Friday on the open as the Dow flirted with 20,000. However, by the close they reversed, ending slightly lower. Overnight, China captured an underwater U.S. drone which caused tension. Housing starts plunged nearly 19% in November which bodes poorly for the housing market. Remember, that came before the Fed raised rates.
Market Outlook: Strong Action
Once again, central banks came to the rescue and sent stocks racing higher. The ECB extended QE in December and will print another 2.4T to stimulate markets and the global economy. As always, keep your losses small and never argue with the tape.
