Let’s get this right… the Fed confirms they want to raise interest rates twice prior to the end of the year, and despite the economic data they declare the economy is strong enough to withstand the rate hikes. That is the same economy by the way which has averaged 1.8% GDP growth the last six years. Yes, the revised estimates for this year are 1.9% growth in GDP. This leads me to the conclusion that a 0.1% increase in growth is all it takes to withstand a hike in interest rates as it relates to the economic outlook. Okay, I apologize, this all makes perfect sense… strike up the band and lets all buy stocks based on that analytical approach. To quote Chevy Chase in ‘Christmas Vacation’, “Holy shit where’s the Tylenol!” As I continue to state, this is a market without clarity, direction or conviction.
Russell 200o Small Cap index hit a new record breaking through resistance and gaining 1.2% on the day. 1275 was the level to clear from the April highs and now we watch to see if the leadership role now assigned to the sector can follow through and carry the burden unlike so many other sectors have not the last six months.
The financial sector (XLF) which was the last sector to put on the face of leadership is struggling with the regional (KRE) and large (KBE) banks consolidating near the highs. The selling in the sector has been driven by the belief the Fed is still dovish towards interest rates and willing to not raise rates if the data warrants that going forward. Evidently they didn’t really listen to the press conference or read the data very closely. This is why beliefs and speculation control direction day-to-day and reality controls trends long term.
The NASDAQ was the big mover on the day with the index hitting 4540 at the high water mark. That puts it near the April and May highs on the move and back in position to take the market higher… again? Semiconductors were up 1.5% and lead the way for the broader index. The other components of tech were on the upside, but the large cap stocks were the leaders overall. This is an index to watch as this unfolds.
The S&P 500 index hit the 2120 resistance mark as it moved back to the April highs and puts the sights on the May highs for the index. Healthcare, Utilities, Consumer Services and Staples were the leading components. Plenty of work to do for this to find the necessary leadership to move through the topside resistance.
Overall I am going to take what the market gives, but I am watching closely how this unfolds relative to conviction from investors. I am not convinced this isn’t just wishful thinking as it relates to economic growth and the Federal Reserves actions going forward. The trend is the boss… we have been moving sideways and now we are in position to break to the upside and continue the previous uptrend. That will take some deeper conviction from the buyers than what I currently see in the statistical data. I have been wrong many times, but in the process I will error to the side of safety first and then when the market validates put my money at risk… not until. Tomorrow is another day and I will address more of what we are watching in the research notes in the morning.