Fed’s Fairy Dust Could Push Market to New Highs

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Tuesday’s trading session was the antithesis of Monday’s action: Energy stocks rallied, the U.S. dollar fell and small-cap stocks outperformed large caps. And so the seesaw continues.

Most of the hedge funds I spoke with on Tuesday brought up Apple Inc. (AAPL) with varying opinions on which way the stock would head after earnings. After the close, the tech giant reported quarterly revenue dropped for the first time in 13 years, and shares sank almost 8% in after-hours trading.

Personally, when faced with such a major earnings report, my strategy tends to be defensive. I try not to gamble on the specific outcome. Instead, I typically wait to see how the stock behaves post earnings, and whether it has an impact on its sector, which in the case of Apple, is represented by the Nasdaq 100. In that vein, I plan to update you with my latest thoughts on Apple in tomorrow’s Daily Market Outlook.

Another major focus for investors on Tuesday was today’s Federal Open Market Committee (FOMC) meeting announcement and the looming interest rate decision. With long-term bond prices falling and yields rising over the past two weeks, the bond market is signaling that the Federal Reserve may sing a hawkish tune today. If so, we could see the dollar rally and commodities fall, while equities will be unlikely to sustain any rally even if they initially bounce.

Earlier this week, I highlighted the relative weakness of the Nasdaq 100 versus the S&P 500. To shed some more light on this dynamic, below is a ratio chart of the Technology SPDR (ETF) (XLK) and SPDR S&P 500 ETF Trust (SPY).

XLK SPY Chart
Click to Enlarge

The breakdown in this relative picture is quite clear, and Tuesday marked the fourth consecutive day of losses for the Nasdaq.

Last week, I also pointed out the relative breakdown of utility and consumer staples stocks versus the S&P 500, which are additional signs that market breadth continues to deteriorate.

The SPDR Dow Jones Industrial Average ETF (DIA) is just 2% away from its all-time high.

DIA Chart
Click to Enlarge

Could a few better-than-expected earnings reports and some fairy dust from the Fed take DIA to marginally higher highs?

Of course they can. But note that after the steep ascent off the January/February lows, DIA (like most other indices) is very overbought and momentum oscillators are showing divergences. In other words, even if we see a small push higher from here, neither market breadth nor momentum support a sustained breakout.

Conclusion

I remain a seller on any further strength or bearish reversals for the broader market. For DIA, a break below the $178 area, the 21-day simple moving average, would confirm a better corrective leg is under way.

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.

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As of this writing, Serge did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/daily-market-outlook-feds-fairy-dust-push-market-new-highs/.

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