Market makes a move above short term resistance, but the conviction of the move is short of convincing. The S&P 500 index is holding above the 1340 level, but it is doing so with some timidity. The FOMC meeting is looming large for investors. This is a rally built on stimulus or speculation there is more help on the way from the Federal Reserve. If they fail to deliver there may be a reversal in the move off the June 4th bottom. No, I am not attempting to be prophetic, just looking at what is driving the market activity.
Bond yields are saying something about the outlook. The yield on the ten year Treasury fell to 1.58% again. Is this a sign of what investors think the Fed action will be? Fear relative to Europe as more money pours into the bond? Foretelling of the economic outlook for growth? Whatever the story line, the drop in yield is generally not a good sign for stocks.
The VIX index showed a big decline on Monday’s silent rally for stocks. The index dropped as if the broad markets produced big gains. The move reflects an unwillingness of the sellers to stand and fight the Fed. They know better! They will be waiting for the announcement on Wednesday relative to what the Fed does offer in the way stimulus. The offering will have to follow the main story line of the ‘Three Bears’, and not be to much or too little, but… ‘just right’! That is a tall order for the Fed, and one that offers more probability of disappointing than hitting the right tone. Watch the VIX heading into the announcement and after the announcement. It will give some insight into the momentum of the market short term.
The NASDAQ took on some leadership on Monday, in fact it was the only real positive storyline for the broad markets. The large cap stocks in the NASDAQ 100 remain strong short term leading the charge higher. The good news came from the semiconductors which were up 1.4% to the lead the index. Software, networking and internet stocks continue to lag the overall technology sector. If the rally is going to produce more on the upside it will tech to take on a leadership role again. XLK, SPDR Technology ETF moved through resistance at $28.50 showing a positive move. The follow through will be the key relative to the move higher.
Financials failed to make a follow through move on the upside Monday as the worries relative to Spain weighed on the sector. XLF, SPDR Financials ETF is hitting against resistance at $14.25. A break above that level would be a positive, but it will need the banks to regain some upside momentum, versus being dragged along for the ride.
Stepping back and taking in all the pieces to see what picture this puzzle puts together is the challenge. Europe is stealing the headlines relative to the global markets, and the fear of failure in the euro is the dominate part of the story. The lack of anything catastrophic happening has kept the sellers off stride. The sub-plot of stimulus has taken on a vital role for the markets moving higher. Two weeks ago the markets were accelerating lower on the fear induced issues from Europe. The rally cry came from the central banks being vocal about stepping in to rescue the euro if Greece removed itself from the EU. The promised rescue was interpreted as stimulus and stocks rallied on the hope of more free money. Thus, here we are waiting for another temporary fix to a long term problem. What the market getting, versus what the maket needs, will produce only a short term bounce or trend.
The moral of the story is to look at this activity as a steroid drug for an athlete, it produces short term results, but the longer term effect is uncertain and can cause side effects you don’t necessarily want. The quick fix to the problem will produce a bounce. What happens longer term isn’t necessarily going to be good. Time will tell and for now we will take what the market gives and protect against the side effects of the drugs.