The hysteria over a potential rate hike by the Federal Reserve is over - at least for now. The bad news is that the will-they-or-won't-they (raise rates) debate will continue, likely into 2016. Trading volume was light the three days heading into Thursday's FOMC announcement. Most market participants were on the sidelines waiting for the verdict. The result was no hike by the Fed. As expected the post-announcement Thursday afternoon market was volatile. The widespread selling on Friday could be a case of sell-first, ask questions later, as investors digested the implications of the Fed's decision.

Friday was also a quadruple-witching option and futures expiration. The combination of quad-witching and the post-FOMC session generated a lot of volume. For the week the big cap Dow Industrials and S&P 500 indices posted minor losses while the NASDAQ composite and small cap Russell 2000 indices eked out very minor gains. Banks were the biggest loser for the week with a -2.7% decline. Biotechs were some of the better performers with the group up +1.0%.

The U.S. dollar saw volatile trading but closed nearly unchanged for the week. That didn't stop big gains in precious metals. Gold rallied +2.8% while silver rallied +4.0% by Friday's closing bell. Crude oil was up big on Wednesday with a +5.8% pop as traders reacted to a big decline in U.S. oil inventories. Unfortunately for oil bulls the rally reversed. Crude fell -4.7% on Friday to close at $44.68 a barrel. Meanwhile the bond market bounced that that drove yields on the 10-year note to 2.13%.

*Federal Reserve Decision*

Last weekend we discussed how Wall Street was mixed on the outcome of the Fed's September meeting. Fed Funds Futures, where investors were betting real money on the outcome, only indicated a 28% chance of a rate hike in September. Yet polling and surveys among analysts suggested the outcome was closer to 50:50. As late as Thursday morning the most recent poll had 49% expecting the Fed to raise rates.

If you haven't heard by now the Federal Reserve did not raise rates at their September meeting. The Fed's decision to not raise rates has fanned the flames of uncertainty on Wall Street. It's has also refueled worries over the slowing global economy. The Fed noted that the U.S. is still growing and labor market conditions have improved. However, they are concerned about the slowdown in China and emerging markets. Overseas concerns were strong enough to postpone a rate increase.

Federal Reserve Chairman Janet Yellen tried to suggest that they could still raise at the October meeting but her words seemed to fall on deaf ears. The market's focus is now turning toward the December FOMC meeting as the next potential for a rate hike or early 2016. The International Monetary Fund (IMF) and the World Bank should be happy as they both pleaded with the Fed to postpone their next rate hike into 2016.

Chairman Yellen reiterated her prior comments that the market should be focused on the trajectory or momentum of rate hikes (i.e. very slow) and not the timing of the first rate hike of the cycle. What the Fed really wants to see is inflation headed toward their 2% target. Right now we are not even close. The latest reading on inflation was about 0.2%.

The Fed released their anonymous dot plot diagram on Thursday that shows 13 of the 17 members still expect the Fed to raise rates in 2015. That only leaves the October or December meetings. Since nothing is likely to change in the next four weeks the October meeting seems an unlikely spot to raise rates. Longer-term the committee did say they expect rates to normalize by 2018.

Chart of the Fed's Interest Rate Policy

10 economic charts: link

People do not like to talk about the specter haunting the Fed and that's a Japan-style deflationary limbo. The Bank of Japan tried near-zero interest rates years ago. The result was their economy sank into a deflationary vortex that they are still trying to escape 20 years later.

Economic Data

It was a busy week for economic data. Housing starts fell -3.0% in August to an annual pace of 1.16 million. That's down from a seven-year high in July of 1.2 million. Housing permits improved from an annual pace of 1.13 million in July to 1.17 million in August. The NAHB housing market index, which is a confidence survey among homebuilders, rose from 61 to 62, which is a multi-year high.

Chart of the NAHB Housing Market Index

10 economic charts: link

The Consumer Price Index (CPI) fell -0.1% in August after a +0.1% gain in July. The August decline was fueled by a -2.0% drop in energy prices. Excluding food and energy costs the core-CPI was up +0.1% for the second month in a row. Meanwhile retail sales came in below expectations at +0.2% in August.

The latest regional Fed surveys and industrial production numbers were disappointing. U.S. industrial production dipped -0.4% in August. That was worse than the -0.2% estimate. The New York Empire State manufacturing survey did see a small improvement from -14.9 to -14.7 but analysts were expecting a jump to -5. The Philadelphia Fed business outlook survey fell from +8.3 in August to -6.0 in September. Economists had been expecting a minor dip to +6.5. This was a very sharp decline and the worst reading since February 2013.

Overseas Economic Data

Disappointing industrial production numbers from China and Japan last Monday helped generate a cautious tone for the market. China said their industrial production in August inched higher from +6.0% to +6.1% but analysts were expecting +6.4%. Japan's industrial production for July was -0.8% versus expectations for -0.6%.

Chart of Chinese Industrial Production

10 economic charts: link

Housing prices in China rose +0.3% in August. It was the third month in a row they have risen. China also reported a +10.8% jump in retail sales, which was the largest one-month improvement since December. Meanwhile Japan reported that their exports declined for the second month in a row. The Bank of Japan left their interest rate unchanged at 0.1%.

Speaking of central bank moves the Swiss National Bank left their interest rates policy unchanged at negative 0.75%. The European Central Bank's chief economist told a Swiss newspaper that the ECB was ready to boost their one trillion euro QE program if they need to.

The Eurozone reported their Industrial Production for July came in better than expected at +0.6%. That's an improvement from -0.3% in June. The region's CPI for August was flat (0.0%), which was better than expected (-0.6%). Unfortunately the Eurozone ZEW economic sentiment survey fell from 47.6 to 33.3, which was significantly below expectations.

Greek Elections

You might find it hard to believe but Alexis Tsipras is once again the Greek Prime Minister. On Sunday (Sep. 20th) the country held their fifth election in six years (and their third in the last eight months). Here's a bit from TheGuardian.com, "After seven months of turmoil, broken promises, a referendum, a capitulation in Brussels, and a split that saw one-third of his MPs quit, he's heading back to the prime minister's mansion with a similar mandate to the one in January."

Here's a bit more on the Greek vote from the BBC website, "With 60% of votes counted, Syriza is projected to be just short of a majority but the Independent Greeks have agreed to join a coalition. The latest figures give Syriza 35% of the vote, compared with New Democracy's 28%... The snap election was called after Syriza lost its majority in August. This followed the signing of an unpopular new financial bailout deal with international creditors. Turnout in this poll was just over 55%, down from 63% in January and low by Greek standards."

I'm not sure this has any impact on the market on Monday but if it does I suspect it is market negative. European leaders didn't like working with Tsipras the first time. That relationship is unlikely to improve now that he claims he has a new mandate.




Major Indices:

The big cap S&P 500's reversal from Thursday afternoon and widespread decline on Friday left it with a -0.15% loss for the week. It is down -4.9% for the year. We expected a volatile afternoon on Thursday. Unfortunately the move looks like a failed breakout past resistance near the 2,000 level. Friday's drop has broken the short-term up trend of lower highs, which is bearish.

There is a lot of congestion in the 1,900-2,000 region so further declines are not guaranteed but I suspect the path of least resistance is down. The August lows near 1,865 could act like a magnet (and hopefully support).

Intraday chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ Composite fared a little bit better with a +0.1% gain for the week. This index is still up +1.9% for the year. Unfortunately last week's action looks bearish. The NASDAQ's rally reversed at technical resistance on the simple 50-dma and near its trend of lower highs. I suspect that any further follow through lower probably pushes the NASDAQ into the 4,600-4,700 region.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index actually had the best performance among the major indices with a +0.48% gain. The $RUT also saw its Thursday afternoon rally fail beneath the 50-dma. Yet the sell-off on Friday did not break the bullish trend of higher lows but that doesn't mean it won't break on Monday. The path of least resistance still looks lower. A double bottom near round-number support at 1,100, near the August low, would look like a much more attractive bullish entry point for traders. Year to date the $RUT is down -3.4%.

chart of the Russell 2000 index



Economic Data & Event Calendar

The pace of economic data slows down this week but there will still be plenty of headlines. U.S. durable goods orders are expected to fall after a three-month rise. On Friday will be the final look at consumer sentiment for September which will likely dip from August's 91.9. We'll also get the another estimate on U.S. Q2 GDP growth. Last time an adjustment in inventory data pushed Q2 GDP growth up to +3.7%. Analysts are not expecting any change. Currently the Atlanta Fed is forecasting Q3 GDP to dip to +1.5% growth.

There will be a lot of important people speaking this week. A handful of European Central Bank members will be speaking this week and you never know if they might say something market moving. The one to watch will be ECB President Draghi on Wednesday. His counterpart, Fed Chairman Yellen, will speak on Thursday. Additional Federal Reserve Presidents speaking this week include Atlanta's Dennis Lockhart and St. Louis' James Bullard.

Chinese President Xi Jinping will spent most of the week visiting the United States. He arrives on Tuesday and will meet with President Obama on Friday. Jinping will address the U.N. at their annual meeting next weekend. Catholic Pope Francis precedes him and will address the U.N. on Friday.

There will also be several central banks updating their interest rate policy. None of them are likely to be market moving. Banco de Mexico will likely leave rates unchanged at a record low of 3%. Norway will probably leave rates unchanged at 1%. Additional central banks meeting this week include Columbia, the Czech Republic, Israel, and the Philippines.

- Monday, September 21 -
Existing Home Sales

- Tuesday, September 22 -
China's manufacturing PMI

- Wednesday, September 23 -
Eurozone's manufacturing PMI
ECB President Mario Draghi speaks in Brussels

- Thursday, September 24 -
Durable Goods Orders
Fed Chairman Yellen speaks in Massachusetts
U.S. new home sales

- Friday, September 25 -
Q2 GDP estimate
University of Michigan Consumer Sentiment

Additional dates to be aware of:

Oct. 2nd - Nonfarm payrolls
Oct. 28th - FOMC meeting
Nov. 26th - Thanksgiving holiday (markets closed)
Dec. 16th - FOMC meeting, new forecast Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

Q3 Earnings Season

There are only ten days left in the third quarter. You know what that means, right? Q3 earnings season is just around the corner. Right now expectations are falling. Over 90 S&P 500 companies have already lowered their Q3 guidance. The biggest culprit is the energy sector. Earnings among energy companies is expected to plunge -65% thanks to the decline in crude oil. Material-sector companies are also expected to see a significant drop of about -10% in profits. Potentially countering these declines are positive earnings forecasts in the healthcare, financials, and consumer discretionary companies.

Overall expectations are negative. Barclays just cut their 2015 earnings forecast for the S&P 500 to zero, as in no profit growth for the whole year. Barclays believes that the strength of the U.S. dollar combined with a slowdown in emerging markets will erase any profit growth for the year. This move follows a similar downgrade by Goldman Sachs several weeks ago. Alcoa (AA) kicks off earnings season on October 8th.

September's Poor Performance

As you know September is historically the worst month of the year for stocks. If you drill down and look closely at September's pattern the second half of the month is the worst. According to the Stock Trader's Almanac the week ahead has only posted a gain five times in the last 27 years. Ryan Detrick, a chartered market technician, did some research and noted that since 1950 the week ahead is normally the worst week of the year. link. According to Detrick the next three weeks tend to be the worst time period for stocks all year long.

Considering the market's reaction to the Fed's decision and where we are on the calendar I would be cautious. Get out your shopping list and identify which stocks you'd like to buy on a pullback. You might get your chance in the next three weeks.

~ James