Stocks paused Thursday following the Fed’s surprising announcement on Wednesday that they would continue to purchase bonds at the current rate for the time being. Following a modestly higher opening, stocks traded sideways and then sagged slightly for the remainder of the session.
The decision not to start cutting back on stimulus came as a surprise to The Street, and high-dividend stocks jumped. Some of those gains were relinquished on Thursday, especially those in the defensive groups like utilities and consumer staples. Seven of the 10 S&P 500 sectors closed lower.
Initial jobless claims were better than expected at 309,000, compared to an anticipated increase to 330,000. Existing homes sales for August increased to 5.48 million, while the consensus expectation was for 5.25 million. And the Philly Fed’s Business Outlook Survey increased to 22.3 in September from 9.3 in August versus an expected 9.0.
At Thursday’s close, the Dow Jones Industrial Average was off 40 points at 15,637, the S&P 500 fell 3 points to 1,722, and the Nasdaq rose 6 points to 3,789. The NYSE traded 738 million shares and the Nasdaq crossed 407 million. Decliners outpaced advancers on both exchanges by about 1.3-to-1.
Both sentiment and price action are positive on the charts of all three major exchanges. And a pickup in volume supports the advance. Support is now at the S&P’s breakout, which is the August high of 1,710.
The good news is that the advance is supported by a confirmation signal from the Dow Theory with a new high in both the Dow industrials and the transports (barely), and sentiment is positive on all major charts.
However, MACD, momentum and the Relative Strength Index (RSI) are overbought. It is the RSI number that concerns me the most.At 72.13, it is higher than the August high at 70.1 and about as high as the May high at 72.51. And most rattling is that both of the prior highs were closely followed by sharp adjustments in the S&P 500. From May to late June, the index declined 5.8%, and in August to September, it fell 4.8%.
Conclusion: It is time for reflection and study, not new purchases, especially since today is a triple witching — the expiration of stock index options, stock index futures and stock options. This means the market could have a number of volatile swings. Also, the Dow industrials are up 5.6% in September and 19% for the year, and profit-taking could dominate for several days.
“Investigate before you invest” is good advice following the Fed’s misleading “transparency” policies that had virtually everyone expecting a “tapering” of their easy-money run. Everyone, not only in the U.S. but worldwide, was caught off-guard. Thus, adjustments to investment policies by major money managers will have to occur, and we want to be on the right side. Let’s cool our heels until we can discern the market’s next move.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.