Well the Fed finally took a break from the long string of interest rate hikes and the market reacted negatively. This pause by the Fed made me flash back to the January rally. I was on vacation and checked the market news after I saw a huge rally on a TV ticker. The reason for that huge pop on the first day of the year -- speculation that the Fed would soon be done hiking rates. Fast forward eight months and look at what we get. Below is a 5-minute chart of the S&P 500 today.
For the people who ask me why I don't trade on Fed decision days, this is why. That's the typical action after a Fed decision, quick, violent reversals. That's too hectic for my taste.
Let's not make too much out of the fact that the market dropped a little after the Fed decision. It often takes a day or two after the Fed to get the real market interpretation. That notwithstanding, here are the charts of the indices...
The Nasdaq is threatening support just above 2,050 but it's getting a bit of a lift in the after-hours session thanks to Cisco (Cisco???). I doubt that CSCO can save the day but I guess stranger things have happened. It sure feels like the July lows will be retested soon so I'm busting out the bear costume on a break of the August lows.
The S&P continues to chop around between 1,280 and its 200-day moving average. I still don't like that bearish divergence in On Balance Volume.
The Russell dropped 1.38% today and looks very weak. It's under all the important moving averages and those averages are aligned bearishly -- the faster ones under the slower ones.
Last and least, the Dow. Note that the Dow's moving averages are still aligned bullishly -- the 10-say above the fiddy, which is above the 200-day. In that respect it's the exact opposite of the small caps (Russell 2000).
All the short term trends are now down since all three indices are under their 10-day moving averages.
| Trend | Nasdaq | S&P 500 | Russell 2000 |
| Primary | Down | Lat | Lat |
| Intermediate | Down | Up | Lat |
| Short-term | Down(-) | Down(-) | Down(-) |
(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend
On one hand the Fed gives the signal that they are still in tightening mode and just took a break. On the other hand thay make believe that the economy will slow, making any more rate hikes unnecessary, and even leading to consider cutting rates by the end of the year.
I believe that this type of language is not a good thing for markets. The issue is that we are at a turning point in the monetary policy, but they do not want to build confidence in it too early. It would have a significant impact on markets. Better to provide slowly the first signals displaying some posssibilities that the interest rates scenario will change.
What is happening is that the smart money are already leaving the cyclical sectors to move towards sectors that might benefit from the policy change.
See in the figure the performance of the various indusries during the past 3 months.
Among the best performes you can find Healthcare, Fixed lines telecomms, Tobacco, Electricity, Utilities, Pharmaceuticals. Isn’t it a sign of change? I guess so. And the shift will become more and more evident in the next months, when the slow down of the economies will impact on commodities prices. Small caps, technology and emerging markets present a higher risk in my opinion. It is important that markets develop and digest the policy change without crashes or excessive volatility. What occurred last May to the emerging markets, in fact, might be a first signal of what could happen if the process of reallocation of capitals were too fast.