There was big expectation wrapped up into today's FOMC meeting, policy announcement and press conference. Our fearless banking leader, Ben Bernanke, had quite a lot on his shoulders. Not only were we all waiting for the results of the announcement and statements but also for sign of when he would be leaving. After Obama's outing on TV the other day I don't think anyone will be surprised when we start hearing names for new candidates. Now brings the question of tapering back around to the present. Now the subject of conversation has turned to if he's on the way out is he going to leave things as is, or will he set the course for tapering before he leaves.
Traders around the world were a little nervous today. Asian stocks ended the day mixed. Most ended the day down by about 1% or so, the Nikkei was the one bucking the trend. Japanese stocks gained 1.8%. In Europe things were slightly calmer. Indexes here closed in the red but only mildly. The CAC 40 was the leader with a -0.5% decline. There was not much news from either region in a sort of economic calm before the Ben Bernanke storm.
SPX 30 Minute Chart Before
The market went very still right around 2PM. The S&P, which had been trading down about 3 pts all day climbed back to zero in tune with the announcement. After the announcement the index moved briefly into the green before falling back and losing 6 pts. At the same time gold moved lower, the dollar index spiked higher and oil declined. There was not much change to policy and nothing that I took as a move to calm market fears as was hinted at previously.
SPX 30 Minute Chart After
Economic data was very light today other than the FOMC meeting and only includes mortgage index reading for June 15th. The index moved lower by 3.3% versus a gain of 5% last time. Not much attention was paid to it as all eyes and thoughts were turned to the Fed. In a nutshell the statement says that downside risks are diminished, housing is still improving and that the economy is growing a little faster than previously forecast. There was no change to policy and no change to QE. Based on the current inflation forecast, which was lowered by a half percent, and unemployment forecast tapering wouldn't begin until mid next year. Inflation is expected to run at 1% for this year and then tick up next year reaching the 1.7% level in late 2014. Unemployment is expected to drift lower over the next year until reaching 6.5% around the same time.
During the press conference Bernanke addressed the current policy and tapering. He said that the economic conditions were improving but still warranted the current stimulus. He also said that the committee would provide information on unwinding at the appropriate time. Based on current conditions and outlook he believes tapering could begin as soon as late this year and asset purchases could end by mid 2014. He went on to say that the market should not view economic conditions as triggers but as a threshold. What he meant was that 6.5% unemployment and 2% inflation will not necessarily trigger unwinding but are the conditions that may lead to it. The expected question about President Obama's remarks were brushed aside with a smile.
The Dollar Index
The dollar spiked against the basket of world currencies after the announcement. The index had been trading down ahead of the announcement and looked ready to move even lower. The index is roughly in the middle of its 12 month range with strong bearish momentum. The recent decline from the peak last month has left the index oversold at this level. A bounce back could take the index to the 82 or 83 level.
The yen slid sharply against the dollar on the news. The USD/JPY extended its bounce from the 38.2% retracement, 150 EMA and the 95 support level. This level (95) is the original target value for the yen versus the dollar set by Abe all the way back before he was elected. The Japanese fiscal policy is long term and has long term objectives, it makes sense to find long term support in this pair. There is some resistance ahead in the form of the short term moving average and previously breached Fibonacci. Stochastic is showing the second and stronger signal but a break above resistance would still be needed for a long term bullish outlook. Because the yen slide and dollar strength are being driven by stimulus policy in both countries there is still some downside risk here as well. However, I think we may see more action from the BOJ if the yen looks like it will move below 95.
The euro also weakened versus the dollar. The EUR/USD fell back from its four month high to trade below the 1.3300 level. Declining momentum and overbought conditions suggest the pair may be at the top of a range and headed lower. If the pair fails to regain the 1.3300 level downside targets exist around 1.3200 and 1.3100.
Gold Moves Lower
Gold prices have failed to recapture the $1380 level breached last week. The metal was trading to the upside today but only by a few dollars. After the FOMC announcement prices turned red and fell below $1360. It looks like the retest of recent lows around $1326 is eminent. The Gold Index has also moved lower and has now broken through the 78.6% retracement level for the second time. Momentum and stochastic are bearish at this time and point to lower prices. If the Gold Index fails to hold at the current levels a full retracement to the pre-recovery level of $75 is the next target.
Oil Index At Support
Oil prices declined today from its four month high. A bigger than expected build in oil inventories helped put pressure on prices. The oil index has not been matching its underlying commodity and has fallen back to support over the last few weeks while oil prices have moved up. The index is now sitting just above a long term support level with bullish indicators. Support exists at 1,350 with near term resistance at 1,400 and 1,425.
There were some story stocks today. The early earnings season is underway and companies like Federal Express and Redhat were on tap. Federal Express beat expectactions smartly. Reported earnings of $2.13 per share were about a quarter higher than the consensus estimates. The gains in profits came on increased cost reductions and improved margins. The company cited tepid conditions and lower cost competitors as challenges but states that Fed Ex is positioned for long term growth. Company guidance for the full year was below expectations but that did not stop buyers from stepping in. The stock made a wild ride today as the initial sell-off was met with new buyers who sent prices up through resistance. By days end the stock closed close to where it opened, forming a large doji. I expect to see Fed Ex trade in a range over the near to short term.
Men's Warehouse hit the headlines today with a highly irregular event. The companies founder and CEO Zimmer was fired this morning ahead of a major shareholder meeting. The meeting was postponed due to the event and company spokesman declined to comment on the why. Share prices took a big hit in early trading but regained most of the losses by the day's end.
Redhat reported earnings after the bell today. The company was expected to earn about $0.21 per share and surprised markets with an exact match. Revenues, sales and subscriptions all grew by double digit numbers and the company expects to see that continue into the rest of the year. The stock traded down during the day but closed off of the lows. After the release prices jumped more than 2%. Indicators are inconclusive at this time but suggest the stock may move up in the near term. Competitor Oracle reports tomorrow.
The VIX declined today even while the SPX declined. This is a sign that options positions were being sold at the same time as stocks, keeping prices somewhat stable relative to each other. The VIX is moving down from the extreme high levels reached just last week as tapering fears were mounting. Indicators are moving down at this time, the 15 level will be an important potential support level for this index. If the VIX fails to break below 15 it could signal upcoming market reversal.
The transports moved lower today along with the rest of the market. The DJT is now just below the 30 day EMA but above long term support and the point of the previous break out. Near term support exists at 6,250 with longer term support around 6,150. Indicators are still bullish and point to at least a retest of the recent highs near 6,500.
The S&P 500
The S&P turned volatile following the Fed announcement. After an initial venture into positive territory the index quickly fell back to -6 and then during the press conference dropped even more. Trading was up and down for a while until prices settled down to the days lows just before the close of trading. The move brought the index to just below the short term 30 day EMA but where does it leave us?
The S&P 500 long term up trend is still intact. Today's drop brought the index back down to the long term support of the up trend line and the line from which the index has bounced twice the month already. Since Ben and the FOMC have not altered the long term outlook I see no reason to alter my long term analysis. There have been no changes to policy, GDP growth expectations are improving, tapering is close but not too close and we can expect interest rates to remain low far into the future. The current level, supported by stochastic and MACD analysis, still look good as an entry point.
There is resistance to consider. The index is facing technical resistance at the new all time highs near 1675. There is also the economic conditions. Should data improve substantially the Fed may opt to move quicker than indicated and if it deteriorates the health of the economic recovery comes into question. For now I am looking to the long term trend line for sign of direction. A break below has a near term target of 1575. A bounce will find resistance at 1650, 1675 and 1690. A break above that could take the index up another 100 points. Failure to break above puts the index in danger of reversal.
Long term direction in the market is unclear at this time. At the moment the indexes look good to move up but there is risk in that assessment. The S&P will need to break out to a new high before a fully bullish stance can be taken. Until then the index could trade between resistance and the up trend line, possible testing both levels. Be careful of whipsaws and false signals. Tomorrow will see more unemployment data as well as Philly Fed and Leading Indicators. None of these reports is likely to move the market long term by itself but any could add volatility to tomorrow's session.
Until then, remember the trend!