Stocks finished mixed on Thursday, with the S&P 500 finishing its third day below the 2000 level. Since shares rallied out of the early August low, things have been quiet.
Too quiet.
For the last four weeks, the Dow Jones Industrial Average has been contained in a 161-point range with multiple tests of support at 17,000. Today was the second intraday breach of that critical level — a possible sign of weakening market support. That’s corroborated by narrowing measures of internal breadth I’ve been seeing as fewer and fewer stocks participate to the upside.
However, that’s all set to change over the next week, starting on Friday.
Click to Enlarge That’s when we get a busy economic calendar featuring an important update on retail sales, consumer sentiment and business inventories. Retail sales disappointed in July, holding unchanged from June despite the improvements we’ve seen in the job market. A poor result for the critical back-to-school shopping season will pull down estimates for the holiday season. (Analysts expect a 0.6% increase, for the record.)
Keep an eye on auto sales as well, which has been a strong point in the economy lately, with student loans and auto loans the two big sources of credit growth right now. Auto sales declines in July and June are a possible sign of oversaturation.
But it’s next week when the excitement should really start.
Forget airstrikes on ISIS. Forget Ukraine. Forget Iraq. Forget everything. Because the only thing that seems to matter to this market is the Federal Reserve. And we’ve got a massively important Fed policy statement coming on Wednesday, Sept. 17. Not only is the Fed expected to drop its “considerable time” language in reference to how far away the first interest rate hike since 2006 is but the statement should also confirm that the ongoing QE3 bond purchase program (in place since 2012) will come to an end in October.
Click to Enlarge Aside from the statement itself, Fed policymakers will update their individual projections on the economy and the pace and timing of interest-rate hikes. Already, based on the last batch of projections from back in June (before a very strong run of job gains), the Fed has a much more aggressive outlook on where interest rates will be over the next few years vs. where the market is.
Investors still want to believe that the era of 0% interest rates isn’t going to end. But the Fed — mindful of the dangers of waiting too long to normalize policy after expanding the monetary base from $800 billion before the recession to more than $4 trillion now — recognize that they are very close to achieving their goals. The unemployment rate stands at 6.1%. Consumer price inflation is near 2%. Stocks are near all-time highs.
A hawkish Fed day on Wednesday could rattle a lot of investors back to reality, and push stocks through the support levels they’ve been lazily resting on for weeks.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
