The Fed issued its monthly interest-rate proclamation on Tuesday, but it had little impact on the stock market. Prior to the 2:15 p.m. announcement, trading was listless, and even though the Fed made it clear that it was willing to support the economy with additional measures, the markets closed flat.
Even better-than-expected housing starts and an increase in building permits also failed to move the markets higher. The Commerce Department said that housing starts surged 10.5% in August, and single-family starts rose 4.3% while building permits increased by 1.8%.
One investment officer was quoted in the Wall Street Journal as saying, “If this housing news came out several weeks ago, we might have had a huge market move.” He went on to say that the jump in stock prices since late August may have dulled the impact of the housing numbers. And the Fed announcement overshadowed the good report, as well.
In addition to pledging more support to a slow economy, the Fed kept interest rates at current levels. The governors also let it be known that they are uncomfortable with the current low rate of inflation, but indicated that the chances of a double-dip recession are less likely.
Financial stocks were the worst performers yesterday, down 1.%. Airlines were the best performers, up 1.9%.
The U.S. dollar fell after the Fed announcement and the euro rose sharply, gaining 1.5% against the dollar to close at $1.3247.
At the close, the Dow Jones Industrial Average rose 7 points to 10,761, the S&P 500 fell 3 points to 1,140, and the Nasdaq fell more than 6 points to 2,349.
The NYSE traded just over 1 billion shares, and decliners outnumbered advancers by almost 1.8-to-1. The Nasdaq traded 625 million shares with decliners ahead by 1.6-to-1.
Crude oil for October delivery fell $1.34 to $73.52 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) rose 4 cents to $54.84.
December gold rose $6.90 to a new record close at $1,287.70. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 1.23 points, closing at 195.58.
What the Markets Are Saying
As noted in yesterday’s Daily Market Outlook, the S&P 500 and its companion indices broke through the top of the summer’s trading range on Monday. This changes the intermediate trend of the market to up from sideways, and could lead to an eventual breakout of the top at 1,220, made on April 26.
Some analysts are pointing to this as a reverse head-and-shoulders breakout, which, if confirmed, would portend a target of 1,233. But just like the failed head-and-shoulders of Aug. 24, this proposed formation will have to meet stiff requirements before it can be certified as a true reverse head-and-shoulders. Please see yesterday’s Daily Market Outlook for a complete review of the requirements.
As for yesterday, this could have been the second most interesting day of the year for technical analysis. Just as the Aug. 25 bottom at S&P 500 1,040 sprang from a reversal (up) on a Collins-Bollinger Reversal (CBR) signal (our proprietary indicator), yesterday’s chart of the 500 reversed (down) after just one day above the 1,130 mark. Further, yesterday’s reversal was accompanied by a sell signal from the overbought slow stochastic, while on Aug. 26, a buy signal was triggered by the slow stochastic.
And here is another similarity: On Aug. 25, negative news dominated the session (new home sales were down), while yesterday positive news dominated the session (Fed meeting and surge in housing starts).
Conclusion: Yesterday’s reversal (CBR) down, accompanied by a sell signal from the stochastic, and a decidedly mediocre reaction to good news, tell us that the stock market is overbought and, at the very least, due for a correction.
The first meaningful support for the S&P 500 is at 1,130, and next is the 200-day moving average at 1,116. These support lines must hold if the S&P is to confirm Monday’s breakout. But if it fails to hold at those crucial support lines, look for a quick retracement back to the 50-day moving average at 1,095.
Find out how to make a quick buck on the correction here.
Today’s Trading Landscape
Earnings to be reported before the opening include: CarMax, General Mills and Jefferies Group.
Earnings to be reported after the close include: Bed Bath & Beyond, IHS, Red Hat and Steelcase.
Economic reports due: Bank Reserve Settlement, MBA purchase applications, FHFA House Price Index and EIA petroleum status report.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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