The Fed did not fail to to proceed as expected.

Introduction

The Federal Open Market Committee did not surprise the market today. The chosen path was pretty much in line with the broad consensus except for one thing. They left the words “considerable time” in the statement. However, before I get into that we need to back up to the beginning of the day. Global markets were mixed this morning in anticipation of commencement of the Fed meeting and release of the policy statement which happened at 2PM.

Asian markets were basically flat except for the Hang Seng which shot up 1% on hopes the Chinese government would stimulate the economy a little more. European indices were modestly higher on a combination of hope for Chinese stimulus and the FOMC. Futures trading was flat to negative in the wee hours of the morning. This lifted a little after CPI data was released, showing that inflation is not a problem, and turned positive going into the open. The SPX opened above 2,000 today and was able to hold that level int the close.

Market Statistics

Stocks moved slightly higher after the open, about 0.25%, led by the transports. This held for a while but after reaching the early peak around 10AM stocks drifted calmly sideways until 2PM. Of course, at 2PM this all changed. There was an initial struggle between the bulls and bears that lasted a few minutes, causing a sharp swing first higher, then lower and then back higher. Finally, after the rush to get in finally let up the markets fell back to support creating dojis on both the SPX and the DJI.

A couple of things to take note of today. First, the Dow set new all time closing and intraday highs. Second, the Dow Jones Transportation Average also set a new. It also did not fall back to support during the late afternoon like the other indices.

Economic Calendar

The FOMC

Ok, the FOMC decided to taper another $10 billion, as expected, leaving $15 billion for next month. They say that they expect the taper to end next month but that they are not on a “preset course”. This could mean maybe they don't end it next month, or maybe only taper $10 billion again and leave $5 billion for the next meeting.

As for the statement, they did leave the words “considerable time” in. This doesn't really mean anything because it is largely undefined and could change at the next meeting. Their outlook for the economy was “little changed” from the last meeting, according to statements from Janet Yellen during the press conference. She also said that the committee was “comfortable” with the phrase “considerable time” so it may stay in until they actually do raise rates. She went on to say that the goal at this time was to clearly communicate policy based on the data.

The Fed sees the economy as expanding moderately but that inflation is still cool, below the target rate. They see the labor market as not fully recovered and the reason why wage growth is progressing so slowly.

On interest rates she said the committee will use a target range, rather than a single point, once hikes begin. At that time the rate could fluctuate within the range as needed. Unwinding the balance sheet could take to the end of the decade.

Among current risks to the global economy the EU and low inflation topped the list. Today's decision came on an 8-2 vote with Plosser and Fisher dissenting.

Basically, nothing changed. The taper happened as expected. The FOMC indicated that next month is the likely end of tapering. Interest rates are still on track to be raised. When they are raised they will stay low for a “considerable time” before any real increase is made. All adding up to a modestly improving economy with expectations for continuing improvement into the foreseeable future.

The Economy

There was a good bit of data today as well. First up, released at 8:30AM, was CPI. The consumer price index fell for the first time in over 1.5 years, counter to an expected reading of 0.0%. The decline of -0.2% in August is due primarily to the drop in energy prices seen over the last two months. The drop also sparked a little talk about the possibility of deflation but I think it may be a little early to call that. It does take some heat off the Fed though. Core CPI remained unchanged from the July reading. The Mortgage Brokers Association gauge of mortgage applications jumped 7.9% last week, reversing a similar loss in the previous week. The refinance index climbed 10%.

The Current Account Balance was also released this morning. The estimated deficit for the 2nd quarter fell 3.7% to $98.5 billion. The first quarter was revised down by about $10 billion to $102.2. Compared to GDP the US government deficit fell a tenth of a percent to 2.3%.

The National Association of Home Builders released this month's reading of their home builder sentiment index. The index rose 4 points this month, climbing for the 4th month in a row to the highest level since November of 2011. All three components within the report,(sales, current traffic and future expectations) rose.

Moody's reaffirmed it's rating of Aaa for the US today saying the “outlook remains stable”. Moody's says the size and diversity of the US economy as well as the strength of the dollar and treasury market as global benchmarks.

Tomorrow's economic calendar is no less full with three key reports on top of the weekly jobless claims. Housing starts and building permits will be released at 8:30 along with jobless claims then at 10 the Philly Fed will release its regional survey.

The Oil Index

Oil, WTI, lost a half percent today in a session of flat trading following yesterday's big bounce. One thing hurting prices today was an unexpected build in crude inventories. The build in inventory is an additional reason why crude could remain at the current low level. According to some analysts Saudi Arabia and OPEC could cut production in order to curb rising global supply and raise prices so this potential development will need to be monitored.

The Oil Index moved higher before the open but sold off during the day. The drop in prices today and the fear of further drops in prices taking their toll. The move was halted at support just above 1,625, a level coincident with the bull flag pattern and break out that formed in May. The indicators are still weak but have begun to rollover in line with the long term trend line bounce begun earlier this week. Bearish MACD is receding in the near term and consistent with support in the long term; stochastic is forming the early, weak, trend following signal. There could be some more action along support but unless oil prices fall significantly further the trend is up and the index looks set to retest resistance near 1,700.


The Gold Index

Gold traded flat today until after the Fed meeting, then it fell. At first the metal lost only a few dollars but as the afternoon progressed the loss deepened to $10, $15 and then finally $17 for the US session. The spot price of gold is now at a 9 month low and fast approaching the long term low set last year. Now that gold is really moving it is very possible that momentum could carry it quickly down to $1200 or lower.

The Gold Index fell as well, losing over 2.5%. The index broke through the top of the support zone between $90 and $92.50 and is heading down to the lower end of that range. Today's candle is extreme and very bearish looking but may be signifying exhaustion in the move, at least in the nearer terms. The MACD is showing a divergence in the near term while stochastic is also overbought. This does not mean its time to buy, just that the target support level of $90 will need to be watched closely for signs of break through or reversal.


In The News, Story Stocks and Earnings

Home builder Lennar reported strong earnings today, reflecting the growing improvements in the housing sector. The company was expected to earn only $0.67 per share but stunned the market reporting $0.78 per share. This comes on strong gains in new orders, back logs of orders, a 26% increase in revenue and a 30 basis point improvement to gross margins. The stock responded by gapping up at the open, above one resistance line, and then climbing close to 6% on high volume. The indicators are bullish and pointing to higher prices with resistance just above at $42.50.


Federal Express also wowed the market with earnings today. The package carrier reported $2.10, $0.15 better than expected. The beat is due to strong volumes and a successful price increase for delivery. The company also reported they are planning to increase prices again this fall and reaffirmed full year guidance. The stock surged 3.25% on high volume to reach a new all time high. After a pop like today it is very possible to see a pullback but the indicators are bullish and point to strength.


General Mills also reported today, but did not impress the market. The food company reported a top and bottom line miss driven by weak industry trends and high costs related to merchandising. They did however reaffirm full year guidance in the range of $3.0 to $3.10 per share. The stock dropped nearly 4.5% on the news and is approaching a potential long term support near the $50 level.


The VIX

The VIX traded in a wild range today that suggests a lot of orders got cleared off the books. The volatility index surged higher by close to 20%, touching resistance at $15, before reversing to fall 12% by the close. The candle has a very long upper wick as well and is an added indication of resistance. The indicators are bullish but have peaked and are in line with the index moving lower from resistance. Because it is also expiration week I expect there may be some more volatility in this index tomorrow and Friday.


The Indices

The indices traded higher today but did not hold the intraday highs, except for the transports. The broad market S&P 500 index gaining the least, only 0.9%. The index was able to open above 2,000 and hold that level into the close which is a plus. Today's action created a doji but looks more of a continuation/consolidation than to me than an impending reversal. The indicators, though still bearish, are peaking and consistent with the long term trend. Stochastic is forming the early, weak, trend following signal. There could be some more sideways action in the near term but the short and long term seem to be setting up for another move up. Support is still in the 1,990-2,000 range with resistance just above today's high at the current all time high.


The Dow Jones Industrial Average created a candle nearly identical to the SPX, the only difference being the blue chips set a new all time high. The indicators are also nearly identical to the SPX, with one significant difference; the weak stochastic signal is being confirmed by a MACD zero line crossover. This adds the weight of market momentum to the move and could help to carry it higher in the near to short term. Support exists between 17,000 and 17,150 with no technical resistance save today's intraday high.


The NASDAQ Composite also traded in a similar range to the SPX and DJI but held a little more of the gain, creating a spinning top rather than a doji. I think, however, that in terms of today's action there is little difference. The tech index is setting up for a potential break to new highs but is lagging the broad market and blue chips. This is also evident in the indicators which confirm support over the short to long term but have yet to roll over in the near term. The index is bouncing off long term support, in line with the prevailing trend, so it looks like it will catch up over the next few days to a week. Support is at 4,500 with resistance at the current all time high.


The Dow Jones Transportation Average did not fall back late in the day. The transports, which have been leading the markets for quite some time, powered higher by 1% to set another new all time high. The indicators are bullish but are showing a growing divergence in the near term that could lead to a correction in the index. The stochastic is looking particularly weak at this time but that could easily change if the market follows through on today's movement. Strong, long term support exists about 400 points below the current level around 8,250 and the long term trend line.


The market was very calm today, waiting on the Fed, and then it wasn't. Price action indicates a real tug of war was going on between the bulls and bears, a tug of war that may have been amplified by upcoming options expiration this Friday. In the end though,the bulls won, at least for today. The indices all closed higher with the historical bull-market-leading Dow Transportation Average leading the way with a new all time high.,P. There are some near term obstacles to overcome, such as the Scottish Referendum and the Alibaba IPO on Friday, but the long term trends are still up. The economy has been improving, the Fed sees it improving and today's data confirms that is still the case. At some point in the future that will change but it hasn't yet so I remain bullish on the indexes. It is possible there could be news on the Scottish vote as early as the morning so it could be affecting early trading.

Until then, remember the trend!

Thomas Hughes