In a trend that’s become all too familiar over the last few months, stocks were apparently pulled back from the abyss on Thursday thanks to dovish comments from Federal Reserve officials.
No doubt, they felt compelled to do something after Wednesday’s policy announcement — in which the Fed talked up the strength of the U.S. economy in a hawkish way — rattled nerves on Wall Street.
This time, chairman Janet Yellen stepped in, making comments to a meeting of Democrats that rate hikes weren’t happening “immediately.” Never mind that this merely reinforced what we already know: That rate hikes won’t happen until June at the earliest. It gave the bulls the ammunition they needed to bounce the S&P 500 off of its 125-day moving average.
In the end, the Dow Jones Industrial Average and the Russell 2000 gained 1.3%, while the S&P 500 and the Nasdaq Composite gained 1%. The Dow broke a two-day losing streak.
Crude oil stabilized for a 0.2% gain after testing a fresh low of $43.58 a barrel while gold, which has enjoyed safe haven inflows lately, was hit with a 2% loss. Homebuilder stocks were in focus, rising 2% as a group. Apple Inc. (NASDAQ:AAPL) gained another 3.1% following its record earnings report earlier in the week.
The good news hit a hard stop after the close, however, as poor earnings results continue to creep in. Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings of $6.88 per share versus the $7.19 expected. And Amazon.com, Inc. (NASDAQ:AMZN) reported earnings of 45 cents per share versus 97 cents expected on revenues of $29.4 billion versus the $29.7 billion that was expected.
This follows disappointing results from Alibaba Group Holding Ltd (NYSE:BABA), which dropped 8.8% on weak earnings. That pulled down Yahoo! Inc. (NASDAQ:YHOO), given its minority interest in the company, by 5.8%.
The Yellen comments came amid growing confusion on Wall Street about just how committed the Fed is to its mid-2015 liftoff timing given growing problems in Europe and Asia, a weakening of U.S. economic data, the impact of lower energy prices on corporate profits, a possible Greek exit from the eurozone and other issues.
For example, analysts at JPMorgan Chase & Co. are expecting a June rate hike, while Morgan Stanley has pushed out its rate hike forecast to March 2016.
Yellen’s comments were also in line with an article in the Wall Street Journal from noted Fed mouthpiece Jon Hilsenrath that a March or April rate hike was off that table due to the “patience” language in the Fed’s statement — which Yellen herself said translates into a two-meeting buffer before a rate hike.
Still, there remains big technical problems with this market as fewer stocks participate in the upside bounces. You can see this in the chart above, which shows that the percentage of S&P 500 stocks in uptrends is in a clear downtrend pattern despite the sideways action in price.
Such a negative divergence is typically resolved with a violent move to the downside in stocks to reinvigorate broad buying interest at lower prices.
In response, I continue to recommend a defensive positioning to my Edge subscribers — including a long position in volatility — that has bagged them a 17.4% month-to-date gain versus a 1.7% loss for the S&P 500. For options players, you can see a couple of the recommendations made to Edge Pro subscribers here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
