Fed Rally Not Enough to Break Resistance

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For the first time in nine years, the Federal Reserve raised short-term interest rates, boosting the federal funds rate a quarter percentage point. This was widely expected, but the markets reacted favorably to the announcement.

The decision was unanimous among FOMC members and was accompanied by an expectation of a “gradual” path to future rate increases.

The rate hike came despite a prediction of lower core inflation in 2016. The central bank would like to see this key indicator at 2%; however, it now predicts inflation will fall to 1.6% next year, down from a previously estimated 1.7%.

Some analysts and Fed Chair Janet Yellen said the rate increase is a vote in favor of what is a stronger economic outlook for 2016 and beyond. The 10-year note showed less optimism as bond prices fell and the yield rose to 2.29% from 2.27% on Tuesday.

Nine of the 10 sectors of the S&P 500 advanced. Energy was the lone holdout, down 0.7% as crude oil fell 4.9% to $35.52 a barrel. The EIA storage report showed inventories increased by 4.8 million barrels.

Gold rose 1.4% to $1,076.80 an ounce. The euro fell slightly against the U.S. dollar to $1.0911.

Housing starts in November exceeded estimates, up 10.5%, mostly due to an increase in multi-family starts, which spiked 16.4%.

Industrial production declined 0.6% in November, below analysts’ consensus.

At Wednesday’s close, the Dow Jones Industrial Average gained 224 points at 17,749, the S&P 500 gained 30 points at 2,073, the Nasdaq rose 76 points to 5,071, and the Russell 2000 jumped 17 points to 1,149.

The NYSE Composite’s primary exchange traded over 1 billion shares with total volume of 4.5 billion. The Nasdaq crossed over 2 billion shares. On the Big Board, advancers outpaced decliners by 4.6-to-1, and on the Nasdaq, advancers led by 2.7-to-1. Block trades on the NYSE totaled 5,882, up from 5,532 on Tuesday.

Dow Jones Utility Average Chart
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Chart Key

Some may wonder why the Dow Jones Utility Average was up on a day that the Fed increased rates. Aren’t bonds and their equity equivalent, utility stocks, supposed to fall when the Fed raises rates?

Normally, yes, but these are not normal times. Rates have been near zero for nine years. Thus, some thought the Fed would raise rates more than a mere quarter of a point. And yield-based stocks mostly rallied on the assurance that rates would remain low for an “extended time.”

S&P 500 Chart
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While the S&P 500 rallied Wednesday, it failed to break out above the resistance line at 2,080. Volume was high and MACD is arching up. But the index stopped short of its near-term goal.

Conclusion

I don’t remember a rate increase that was so thoroughly assured by Fed members or anticipated by analysts as this one. And rate increases usually result in a negative response by stocks. However, most economists verbalized the Fed missed its chance to increase rates months ago. Furthermore, if they didn’t do it now, the decision would be interpreted as a non-vote for a healthy economy.

I will stick with selling on strength and buying on weakness until the market breaks the current sideways pattern that is predominantly impacted by news and not earnings.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/daily-market-outlook-fed-rally-not-enough-to-break-resistance/.

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