The stock market continues to ricochet between big gains and big losses. This past week delivered the best weekly performance since July. That followed the second worst weekly drop of the year. The market seems to be building this huge consolidation pattern ahead of this week's pivotal fed meeting.

All of the major U.S. indices posted gains with an average gain of +2% for the week. The NASDAQ displayed relative strength with a +2.9% gain. That's impressive considering the week was only four days long thanks to the Labor Day holiday on Monday. Banking stocks were up +2%. Semiconductors rose +3%. Transports fared better with a +3.3% bounce thanks in part to a drop in crude oil.

$20 Oil?

Crude oil fell -2.6% last week to less than $45.00 a barrel. This pressured oil-related stocks. The oil index was relatively flat (+0.05%) while oil service stocks fell -3.6%. The very influential investment banking giant Goldman Sachs made headlines with their call that crude oil could fall to $20 a barrel.

A few days ago Goldman lower their crude oil forecast for 2015 from an average of $52 a barrel down to $48. They also reduced their 2016 forecast from an average price of $57 a barrel to $45. However, they said their worst case scenario could see oil fall to $20.00 a barrel before the energy market finally removes the current conditions of oversupply. Goldman went on to say that "financial and fundamental metrics are much weaker. Forward demand expectations are lower as the emerging market economic outlook continues to deteriorate."

On a short-term basis oil could see more downward pressure. Oil refineries are closing down for seasonal maintenance and consumption of two million barrels a day will be temporarily postponed at the peak of maintenance. Refinery utilization has already declined from 96.1% for the week of August 7th to 90.9% today. That will continue down into the mid 80% range over the next several weeks. This means inventories will rise for the next 10-12 weeks and they are already near multi-decade highs.

$2 Gas?

One positive effect of low oil prices is cheaper gasoline. The Energy Information Administration (EIA) is forecasting gas prices will hit $2.00 a gallon by December. We haven't seen gas that low in years. Traditionally it is believed that low gas prices mean higher consumer spending as Americans spend the money they save on something else. However, the last time we saw a big decline in gas prices there was no significant surge in spending. The only real beneficiary were the gasoline and convenience store chains who did see an increase for in-store sales. The downside to cheaper oil and cheaper gas is energy-sector job layoffs.

Economic Data

It was a relatively quiet week for economic data. We only had two significant reports. The Producer Price Index (PPI) is a wholesale-level gauge on inflation. The August reading was flat after just a +0.2% rise in July. This followed +0.4% gains in May and June. For the Fed this is moving the wrong direction. They want to see inflation not deflation. Food prices rose +0.3% in August but that was due to a +32% spike in the price of eggs due to the bird flu epidemic ravaging the egg-laying chicken population.

The other report was the University of Michigan Consumer Sentiment index. The early reading for September saw a drop from 91.9 to 85.7. Analysts were expecting a slip to 91.5. September's early reading was the third monthly decline in a row and the lowest reading for the year.

Overseas Economic Data

China remains in the spotlight due to its hard landing, still in progress. Two weeks ago the country was making headlines when its official PMI and the Caixin PMI both posted big declines. The official PMI fell to 49.7, the lowest reading since August 2012. The Caixin PMI hit 47.3, the lowest since August 2009. Numbers below 50.0 suggest economic contraction. This past week the services PMI declined to 54. This is still in positive economic territory but it's moving the wrong way.

The slowing economic picture for China is still generating a lot of volatility in their stock market. Last Monday, when the U.S. was on holiday, the Shanghai index fell -2.6%. On Tuesday morning it dropped another -2.3% and then suddenly reversed higher to close up on the session. China's big reversal higher on Tuesday helped fuel stock market gains around the world.

Nearby the country of Japan said their core machinery orders for July fell -3.6% for the month. That was significantly less than expected. Meanwhile Prime Minister Shinzo Abe was re-elected and gains another three-year term to govern. Abe promised to lower corporate taxes rates by another 3%.

There was not a lot of economic data out of Europe last week. Most of the headlines were focused on Europe's immigrant crisis. Tensions are running high as tens of thousands of refugees and immigrants are flooding into Europe. Many are honestly seeking refuge from war-torn Syria. Others have been accused of merely looking for a better place to live, especially in European countries with a lot of welfare policies.

We will soon be hearing a lot more about Greece again. The country faces elections on September 20th. It will be their third election in the last eight months. Former Prime Minister Alexis Tsipras called for new elections after breaking his promise and giving into the Troika's demands for more austerity. He promptly resigned. However, he is running again and hopes to be re-elected with another mandate from the people. This time he faces a fight. His shenanigans over several months has turned off a lot of voters. His very, leftwing Syriza party is facing heavy competition from the conservative New Democracy party with a pre-European platform.

Major Indices:

The S&P 500's bounce last week pared its yearly loss to -4.8%. You can see on the intraday chart below that it is building a short-term trend of higher lows. Unfortunately this looks like nothing more than a big consolidation pattern after the big sell-off in August.

I would expect this consolidation to narrow as investors wait for the Fed's announcement on Thursday afternoon. The short-term resistance level to watch is 1,990-2,000.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

The NASDAQ outperformed its big cap rivals with a strong bounce last week but it too failed to get past short-term resistance. The 4,850-4,900 area is overhead resistance. The 200-dma near 4,915 could also be a new obstacle.

Soon you'll hear market pundits talking about a "death cross" on the NASDAQ composite. The 50-dma is falling and is poised to cross below the 200-dma by the end of the month. Historical data suggests that the "death cross" or dark cross is not a very reliable indicator although it might impact investor sentiment.

Year to date the NASDAQ is up +1.8%.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

Investors should be cautious with the small caps. The short-term trend of higher lows is bullish but bigger picture for the Russell 2000 looks broken. There is a ton of resistance in the 1,170-1,220 range.

The $RUT is down -3.7% year to date.

chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is busy with economic data. We will get two regional Federal Reserve surveys (New York and Philadelphia). There will be new data on housing. However, everything will be completely overshadowed by the Federal Reserve's two-day meeting on Sept. 16-17th.

- Monday, September 14 -
Eurozone industrial production

- Tuesday, September 15 -
U.S. Retail Sales
New York Empire State manufacturing survey
Industrial Production
Business Inventories

- Wednesday, September 16 -
Eurozone CPI
Consumer Price Index (CPI)
NAHB housing market index
FOMC meeting begins

- Thursday, September 17 -
Housing starts and building permits
Philadelphia Fed regional survey
FOMC (day 2), policy update, economic forecasts
Fed Chairman Yellen press conference

- Friday, September 18 -
...nothing significant...

Additional dates to be aware of:

Sep. 25th - Q2 GDP estimate
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:

Looking ahead the next several days will be all about the FOMC meeting and the aftermath of the Fed's decision to raise rates or not raise rates.

Fed Meeting

The Federal Reserve sets the benchmark interest rate, a.k.a. the federal funds rate, which is the overnight rate that banks lend to each other. It is considered the most influential interest rate since it impacts so many other interest rates and conditions throughout the economy.

The Fed has not raised rates since 2006. They have kept rates near zero since 2008. The idea that they could raise rates this week is significant. The fed funds rate has averaged 6% since 1971. Believe it or not but it hit 20% in 1980. Today the market is worried the Fed could raise rates from near zero (0.0%-to-0.25%) up to 0.5%. All of the market's angst seems a little silly given the long-term perspective.

Short-term traders do have reason to worry. Every time the Fed has begun a tightening cycle (raising rates) the stock market has sold off. Rising rates means higher borrowing costs and that impacts everyone from big corporations, government debt service, and to people buying homes, cars, and students loans. Rising rates tend to boost the dollar as well.

On a longer-term time frame stocks tend to rally as the Fed raises rates but then on a long enough time frame stocks always rally. During a rate hike cycle the stock market's performance is somewhat subdued with an average gain of +8%. However, according to Josh Brown, of Ritholtz Wealth Management, when the Fed finishes its rate hike cycle, a year later stocks outperform their long-term average with a +14.6% gain. The key note there is after the Fed finishes its rate hike cycle.

Today the fed wants to begin a new rate hike cycle. History would suggest stocks underperform but this time could be different. Today Europe and Japan are in the middle of huge QE programs. China has been adding stimulus to prop up their slowing economy. The U.S. economy is growing (albeit slowly) while most of the world is slowing down. The bullish case for stocks is that the Fed would only raise rates because they believe the U.S. economy is strong enough to endure it.

Odds of a Rate Hike

Depending on who you talk to the odds of the Fed raising rates seems to be about 50:50. Almost 49% of economists surveyed by Bloomberg expect the Fed to raise rates this week. However, futures traders only see a 28% chance the Fed raises rates this week. The Federal Funds Futures contracts have been a key signal for traders for years and it currently sits at 28%.

The Fed has been hinting at raising rates all year long. Many believe they need to do it now or lose face before the global markets. Others suggest the Fed had their opportunity months ago and missed it.

Mohamed El-Erian, chief economic adviser at Allianz SE, shared his thoughts on the Fed meeting this week:

"As the debate about whether the Federal Reserve will begin raising interest rates next week reaches fever pitch, each side is being forced to adopt so-called corner solutions, arguing for their respective position with mounting conviction. This is understandable given the demand for a definitive answer. But it also is unfortunate, because both camps fail to take account of some broader considerations that cloud any certainty." (source: Analyzing the Odds of a Fed Rate Increase )
Goldman Sachs is suggesting that the Fed will not raise rates because market conditions have already done the work for them. Goldman doesn't expect the Fed to raise until December or possibly 2016.
"The recent stock market sell-off, an increase in corporate borrowing costs and the rise of the dollar have contributed to a tightening of financial conditions roughly equivalent to three 25 basis-point hikes in the central bank's benchmark federal funds rate, according to a Goldman Sachs Group Inc. report published late Thursday in New York." (source: Tighter Conditions After Market Sell-Off Equates to Three Fed Hikes )
Check out more Wall Street opinions on the Fed meeting this week:

Wall Street Is Deeply Divided Over the Fed's Move Next Week Link

Making the Case for Raising Rates, and Raising Them Next Week Link

Fed Liftoff Has Futures and Economists at Odds for Next Week Link

A Confused Market

Stocks just had their best one-week rally in months. Yet investors are fearful. According to the American Association of Individual Investors the number of bearish investors rose 3.3% to 35.0%. At the same time bullish investors rose +2.3% to 34.6%. The long-term average is 38.7% bullish and only 30% bearish. The CNN Money Fear & Greed Index is suggesting that the market is showing "extreme fear" readings. This gauge is based on several factors you can view on their webpage: Fear & Greed index.

Chart of the Fear & Greed Index

You could make a case for stocks to sell-off no matter what the Fed does on Thursday. If they do raise rates the market could fall because investors are worried the Fed is starting a rate-rising cycle at the wrong time thanks to weak economic conditions around the globe. Both the International Monetary Fund (IMF) and the World Bank have urged the Fed to postpone raising rates until 2016. If they do not raise rates then stocks could fall because it means the Fed does not think the U.S. economy is strong enough to endure it.

No matter what your expectations for the Fed's decision on Thursday one thing is for sure - stocks will see a big move on Thursday afternoon and likely on Friday as well. The only question is whether that move is up or down.

~ James

Not-so-fun fact:

Trading is tough. According to a recent article on the WSJ website,

Stock picking is a dicey business, and in the first half of 2015, the majority of large-cap stock portfolio managers failed to beat the S&P 500's returns.

According to the S&P 500 Dow Jones Indices scorecard of actively-managed funds, 65.43% underperformed the S&P 500 for the 12 months ended June 30.

Looking back even further, their stock-picking ability looks even worse. Roughly 80% of large-cap managers failed to beat the S&P 500 over a five-year and a 10-year investment horizons. (Read more about it here.)