U.S. equities finished mostly higher on Wednesday, with large caps stronger and small caps weaker, following the Federal Reserve’s latest policy announcement.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 gained a fraction, the Nasdaq Composite gained 0.2% and the Russell 2000 lost 0.6%. Treasury bonds were stronger, the dollar weakened notably, gold lost 0.2% after trading higher earlier in the session and oil gained 1.8% as the bulls focused on an inventory draw and ignored surging U.S. production.
Breadth was mixed and volume heavy, with NYSE activity at 103% of the 30-day average. Defensive telecom and utility stocks led the way with gains of 3% and 0.9%, respectively, on a drop in long-term yields. Materials and financials were the laggards, down 0.6%.
The flow of second quarter earnings continued. Boeing Co (NYSE:BA) surged 9.9% and is going vertical after beating earnings expectations by 10% on better margins and tax rate.
United States Steel Corporation (NYSE:X) gained 7.2% on earnings. And AT&T Inc. (NYSE:T) gained 5.0% as lower expenses boosted profitability.
After the close, Facebook Inc (NASDAQ:FB) gained 1.2% after reporting earnings of $1.32 per share vs. the $1.14 expected on $9.3 billion in revenue vs. $9.2 billion expected. Monthly active users increased 17% from last year while advertising revenue increased 47%.
Turning back to the Fed, officials held off on another interest rate hike on Wednesday as expected but left the door open to that start of a “quantitative tightening” balance sheet tightening as soon as September.
What was unexpected, however, was a tip of the hat by policymakers to a recent cooling in the inflation data. The key was that the Fed removed the term “recently” from the statement that inflation measures “have declined” — leading many to assume the Fed believes the recent dip in inflation may be longer lasting.
Moreover, the descriptor that inflation has been running “somewhat below” the Fed’s 2% target was removed.
In response, the U.S. dollar dropped hard pushing the U.S. Dollar Bullish Index Fund (NYSEARCA:UUP) down 0.6% to levels not seen since last June.
Adding to the dynamic was some hawkish comments from a European Central Bank official right before the Fed policy statement hit, noting that it was time to start discussing the end of their bond buying stimulus program.
Conclusion
The big story of the day was the volatility crush pushing the CBOE Volatility Index (INDEXCBOE:VIX) below the 9 level to hit a record low intra-day. That exceeds the low set on December 27, 1993. Translation: Never before has investors felt so good about the markets. And never before have they felt so little fear about downside risk.
But complacency is setting in. And breadth remains narrow with more trading volume in NYSE declining issues than advancing ones (43% vs 57%).
What’s also notable is that for the second straight day, the VIX posted a key reversal by rallying strongly off of its intra-day lows to actually finish higher. Today, the index gained 1.8%. Jason Goepfert at SentimenTrader notes that this pattern has historically presaged weakness for the markets; since it represents savvy traders snapping up downside protection on the cheap.
Since 1992, when this has happened, stocks have gained in only two of 11 attempts with an average downside of 1.4% that far outweighed the average gain of 0.3%. For the VIX, this behavior has tended to mark a short-term low every time but once rallying an average of 15% over the next week.
Check out Serge Berger’s Trade of the Day for July 27.
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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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
