Introduction

The Fed raised rates as expected, got hawkish in their statement and indicated two more hikes this year but the market shrugged it off in favor of positive economic outlook. The statement was much shorter than usual, only about 300 words versus the usual 1000+, but came packed with new wording. The committee sees US economics expanding at a solid pace compared to only moderate, they are optimistic about sustained expansion and have upped their targets for inflation. They see the 2% target hit and exceeded in the medium term as strong labor markets fuel growth.

Most markets in Asia fell as traders turned their attention on today's FOMC rate hike. China led with losses in the range of -1% for both the mainland Shanghai index and Hong Kong-based Heng Seng. Japan was one of few to buck this trend, closing up 0.4% buoyed by shippers, real estate, and automakers. European markets were up modestly higher on the expectation the Fed would give a positive read on the economy, as well as a similar expectation for the ECB tomorrow. The ECB has indicated a willingness to discuss the end of QE, a sign of stabilized growth in the EU.

Market Statistics

The S&P 500 was indicated to open with a small gain all morning. When I say small I mean microscopic and the trade held steady within a very narrow range. This range held steady throughout the early part of the session, creating the smallest candle I've seen since the end of last year, but that all changed with the release of the FOMC statement. At that time a little bit of volatility set it, the indices fell a little, bounced back to break even and then fell again to close near the low of the day. The S&P 500 shed -0.4%, not much considering how volatile the market has been over the past few months, and may move lower in tomorrow's session.

Economic Calendar

The Economy

Today's data was sparse but important, the Producer Price Index. PPI came in much hotter than expected at 0.5% in May, up nearly a half percent from the previous month and double the estimates. The gain resulted in a surge in YOY PPI, up a half percent to 3.1% and well above the Fed's 2% target. On a core basis, ex-food and energy, PPI rose a more tepid 0.1% for the month and 2.6% YOY. The data supports the need for an FOMC rate hike but is mitigated in its importance by the fact the FOMC was expected to hike rates today, and that the PCE price index (at last reading) shows underlying core inflation is still running cool.


The Dollar Index

The Dollar Index index moved up and down within a narrow range in today's session, falling in the wake of the FOMC announcement to close at the low of the day. The index is trapped within a narrow range between $93.20 and $93.80, just above the moving average, and waiting for the ECB and BOJ statement due out over the next two days. The indicators are bearish but show evidence of support at the moving average, so a bounce is possible, the risk is that the ECB is expected to get hawkish tomorrow and that will firm the euro and help pressure the Dollar Index lower. A break below the moving average would be bearish, the next target for support is near $92.15.


The Gold Index

Gold prices edged higher following the FOMC statement but did not move above resistance at the short-term moving average. Resistance is now below the $1,307-$1,310 target and moving lower with the EMA. The indicators are mixed but suggest a test of resistance could come with the caveat the near-term trend is down, and the indicators are set up for a trend following sell signal. A fall from this level would confirm resistance at the moving average and reversal within the long-term trading range. Targets for support exist at $1,280, $1,260 and $1,240. A break above the moving average could be bullish but not without a move above the $1,307-$1,310 resistance zone.


The Gold Miners ETF created a longish doji candle, possibly a hammer but it's hard to tell with sideways movement, that is exactly to the side of the previous month of candles and smack on the pair of moving averages. The ETF has wound up inside short and long-term trading ranges and is at a balance point between bulls and bears. This balance may be tipped with tomorrow's ECB statement, but without a major change to outlook, range-bound trading is likely to persist. A move up would confirm support at this level, a move lower resistance, with targets at the extremes of the range near $21 and $24.


The Oil Index

Oil prices got a boost from today's supply data. The EIA reported a much larger than expected draw of -4.145 million barrels, about four times the expectation, along with similarly large drawdowns in distillates and gasoline. The news caused WTI to spike by 1.5% but was not enough to force the price to break through resistance. Resistance is still at $66.50 and may remain in place in the near term. If prices do move higher, the next resistance target is at the short-term moving average. With the US, the Russian and Saudi output on the rise, OPEC expected to lift its production cap, and overall supply meeting demand, there is not much reason for oil prices to move significantly higher in the near term.


The Oil Index fell more than -0.5% despite the rise in oil prices. The index fell to test support at the short-term moving average and so far support has held. The indicators are bearish and pointing lower after forming bearish crossovers earlier this week, consistent with a move to support at the moving average if not a breakthrough to lower prices. If the moving average is broken expect a move to 1,490, a move below that would be bearish.


In The News, Story Stocks and Earnings

AT&T won a landmark case that is expected to pave the way for mega-media mergers. The long-awaited ruling will allow the company to merge with Time Warner to compete with content giants like Netflix and Amazon. The company is expected to close on the deal very quickly, before the end of this month, so AT&T customers can expect an even more complicated billing, payment and customer service process than what they have to endure now. Shares of the stock fell -5% in today's session while holders of TWX were rewarded with a 5% spike.


Netflix was also in the news following word Goldman Sachs had raised their price target. The investment bank raised its target more than 25% to $490, the highest on Wall Street. The move is based on a "strong fundamental case fundamentals will catch up with expectation." Based on our mad devotion to binge-watching every single cult show and movie that hits the web they are probably right. Shares of Netflix gained 2.5% to hit an all-time high and is fast approaching Goldman Sach's original price target of $390.


Comcast announced a superior bid for Fox assets already targeted by Disney. The move sets the two up for a bidding war with Comcast already offering to cover the break-up fees if Fox should choose to go with them. The Comcast board has already approved the offer, so no vote is required of their shareholders, the company hopes to have its offer reviewed by regulators at the same time as Disney's to expedite the process. Shares of Fox jumped 7.5% on the news.


The Indices

The indices pulled back on the Fed news, but the moves were not very large. The loss leader is the Dow Jones Transportation Average with a decline of -0.77%. The transports created a medium sized red bodied candle confirming resistance at the four-month high. The candle is a small Dark Cloud Cover and may lead to a deeper decline, but the indicators do not support it. The indicators are both bullish and pointing higher, consistent with higher prices, but caution is due. A move up, or a consolidation to the side, would be bullish and could take the index up to the all-time high. A move lower would confirm resistance and could take the index down to the short term moving average near 10,775.


The Dow Jones Industrial Average posted the second largest loss at -0.47%. The blue-chip index created a small red bodied candle moving down from yesterday's resistance level but does not look overly bearish. The indicators are both bullish although showing some signs of resistance at this price level, consistent with consolidation within an uptrend, so a deep decline is not expected. The first target for support is just below today's close near 25,100; a break below would not necessarily be bearish without some major change to fundamentals. The index may move down to test support at the short-term moving average but if so, would be a likely entry for bullish trend-following positions.


The S&P 500 posted the third largest decline at -0.40%. The broad market index created a small bodied red candle moving down from Wednesday's peak. The indicators have confirmed a peak with bearish crossovers that may lead the index down to the short term moving average. The short-term moving average is trending along with the long-term uptrend line so support at the level should be strong if reached. A break below there could be bearish but not without a break of the long-term moving average, and a change to fundamentals. Otherwise, provided the outlook remains favorable, a touch to long-term support would be an entry point for bullish positions.


The NASDAQ Composite posted the smallest loss in today's session, only -0.10%. The tech heavy index created a small red bodied candle with visible upper shadow touching a new all-time high. Both MACD and stochastic are indicating a peak with bearish crossovers, so caution is due at this level. The index may persist in the consolidation or move lower in the near term. The first target for support is 7,600, a break below that could go to the short term moving average.


The FOMC indicated the need for another two more rate hikes this year for a total of four in 2018, but I don't think the market believes them. The CME's Fed Watch Tool is only indicating a 56% chance for four hikes, so there are some people out there who don't think it will happen. Regardless of the number of hikes, the FOMC is confident of sustained growth in the US economy for the first time in 10 years, and that is a compelling reason to be bullish on the market. Today's action was bearish, but it wasn't run for the hills the sky is falling bearish (internals aren't bad, new highs outpace new lows), so I am content to wait and see what happens before changing my market stance. I remain firmly bullish for the long term and cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes