It’s a major week ahead for markets as the Federal Reserve’s Open Market Committee (FOMC) settles into a two-day meeting starting Tuesday and culminating Wednesday with an update on interest-rate policy. Market participants will be watching closely to see whether Fed Chairwoman Janet Yellen will remain “patient” in raising interest rates, or if recent economic data has been good enough to warrant our first rate hike in years.
U.S. stocks, as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), dropped about 3.7% off their all-time highs in recent weeks, and the next few percent of a directional move now most likely entirely depend on how investors want to react to Wednesday’s FOMC statement.
Because of this week’s major FOMC meeting — which, might I add is followed on Friday with a quadruple-witching options expiration day — an update on the SPY now is warranted.
SPY ETF Charts
In a March 4 piece titled “The SPY Breakout Looks Like a Flop,” I mused that stocks’ slow upward move from February is likely to lead to a mean-reversion move lower, and since then the SPY has dropped a little more than 2.5%. I also pointed to the non-confirmation from both transportation and financial stocks, which unlike the S&P 500 did not reach new all-time highs.
Looking at the daily chart of the SPY ETF below, we see that the recent mean-reversion move has brought the index back to its 100-day simple moving average (blue line) and more or less into the middle of its trading range since mid-November. For active investors and tactical traders that were short the SPY ETF over the past couple of weeks, this now likely offers an opportunity to lighten up or entirely close the position because …
- Wednesday’s FOMC statement could see the index fly in any direction, and
- Because a 2.5% gain in a currently slow-moving S&P 500 is respectable.
I believe it’s the financial sector that must again be closely watched this week, given its sensitivity to moves in interest rates. Should the Fed flaunt a hawkish statement, it could lead to a further rise in interest rates and possibly a steepening in the yield curve, which would be bullish for the financial sector of the S&P 500, as represented by the Financial SPDR (NYSEARCA:XLF).
It is noteworthy that the financial sector has showed some relative strength again last week versus the S&P 500, which came on the back of a weak reaction to the January jobs report. This back-and-forth price movement in the banking stocks in particular shows a sense of nervousness on the part of investors as we head into this week’s FOMC meeting.
Active investors this week should be watching the financial sector, for if the XLF can break past the $24.60 area to the upside, then new multiyear highs shouldn’t be too far out in the future — and the SPY will likely also bump higher.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
