Fed Chair calms markets, but risks remain

 

Nov. 30, 2018 – The market has been busy in the two weeks since we last wrote one of these updates. The Thanksgiving-shortened week was pretty grim, but the first three days of this week made up for it. 

Trade, Brexit, and falling oil prices all contributed to last week’s declines. As did concerns about order volume from Apple, which helped push a bunch of semiconductor names lower.

This week, the news, and market action, were much more encouraging. Positive headlines from Europe concerning both Brexit and an Italian budget impasse helped get things started. Better-than-expected earnings from salesforce.com after the bell on Tuesday helped to boost some cloud and other momentum names that have given up a lot of ground recently. 

Wednesday, Federal Reserve Chairman Jerome Powell gave a speech, which, while nominally about financial stability, included a comment that interest rates were currently “just below” the range that could be considered neutral. That was interpreted as considerably more dovish about the frequency of future rate hikes than previous statements. 

Back on Oct. 3 Powell said in part “…we’re a long way from neutral at this point, probably.” That caused an immediate spike in bond yields and kicked of the round of selling in stocks that began in earnest the next day. You can see, in the chart of 10-year bond yields below that since Powell’s initial comments at the beginning of October, yields have given back nearly all of their gains, to return to, essentially, where they were when the stock market was setting new highs at the end of September (the breaks in the chart are holidays).

It seems reasonable to wonder why, if bond yields are back to where they were before the panic, why are stocks still well below their highs? That’s a several-billion dollar question. Stock markets tend to be more volatile than bond markets, frequently overshooting on the way up, and on the way down. It seems easy to make the case that some of the momentum names were overvalued when the market was at those most-recent all-time highs, so they may be below, or closer to, a “correct” valuation now. 

Earnings season, which started in the middle of October, also provided a new set of earnings, and more importantly, forecasts, to base prices on. A number of high-growth companies lowered expectations for growth in 2019, making lower stock prices seem more reasonable. 

Geopolitical concerns also seem more severe today than they did in September. Brexit negotiations are nearing the endgame. Also as of now, higher tariffs on Chinese goods are set to take effect on Jan. 1. President Trump is scheduled to meet with Chinese Premier Xi this weekend. A deal could be reached, but the most-likely outcome seems like an agreement to hold more talks. In that case, the market’s reaction is likely to be based on the tone of any joint statement, and whether or not the U.S. agrees to delay the implementation of new duties while talks are ongoing.

Indices

All told over the last two weeks, the S&P 500 gained 1.6%. The Dow added 1.3% and the Nasdaq rose 2.6%.

After flirting with disastrous levels, the major indices were able to catch a break this week. Although the bounce was likely, it was hard to capitalize on with indecision still running high. With so much hinging on decisions, statements, and possibilities that caused the indices to make large moves quickly, and left speculation on their abilities to hold those gains.

This week, we will be looking at all the major indices on 6-month charts. For the sake of sanity, they will be easier to read and understand this way. You can always look at the charts on a 1-year scale to see why technical support and resistance is placed where it is.

S&P 500

      

The S&P 500 was able to break through two key levels of resistance around 2,700 and 2,745, as well as rise above its 8 and 20-day moving averages. This should give the S&P 500 a reasonable amount of support, which it will need now that it is pressing its 200-day moving average. Crossing the 200-day will be a challenge for the index when you consider technical resistance and its 50-day moving average closing in. Should the S&P 500 cross the 200 and 50-day moving averages, the biggest hurdle in its path will be the level of resistance around 2,795. Hopefully the S&P can follow on this strength, using these recently acquired support levels to break through the tough challenges ahead.

Nasdaq

The Nasdaq, like the S&P 500, was able to break through two levels of technical resistance around 7,125 and 7,250, as well as rising above its 8 and 20-day moving averages. These levels of support should help the Nasdaq to continue rising. It has some room before encountering its next major level of resistance around 7,425, but will have additional hurdles in the form of its 50 and 200-day moving averages should it cross that barrier.

Dow Jones Industrial Average

The Dow Jones is still the strongest of the major indices. It was able to cross its 8, 20, and 200-day moving averages this week. It also placed itself above a very strong level of support around 25,400. It will need all the support it can get, as it will be facing its 50 and 100-day moving averages at the same time should it continue upwards. If it can cross these remaining moving averages, it will have some room to run before encountering additional technical resistance around the 25,800 level.

Russell 2000

The Russell 2000 has been the biggest roller coaster of them all in the past couple of months, dipping extremely low. After approaching its recent lows and a support level around 1,470, it was able to rebound nicely this week. After rising above resistance around 1,510, and crossing its 20-day moving average, it has found support there. Hopefully it will be able to use this support to rise above the next level of resistance around 1,550, before encountering the 50-day moving average.

This week’s activity in Full Swing Stocks

We have one open position headed into the weekend.

  • PVH -3.6%

Bobby Raines

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.

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