Rally May Fizzle Without the Banks

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I am honored to fill in for the venerable Sam Collins today, particularly after the important Federal Open Market Committee (FOMC) announcement.

Federal Reserve policymakers removed the word “patient” from their language on Wednesday, indicating that a rate hike may be a reality in coming months. By so doing, they released the proverbial kraken as most risk assets rallied and the U.S. dollar got smoked. In typical Fed fashion, though, Chair Janet Yellen was quick to reiterate that any rate hike is far from decided and that it remains data dependent.

When it was all said and done, the Russell 2000 closed the day at a fresh all-time high and the S&P 500 finished just 1% shy of its peak. The rally was led by energy and utility stocks, which makes sense given the sharp drop in the dollar and yields.

S&P 500 Chart
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Looking at the daily chart of the S&P 500, assuming the gains don’t immediately vanish in coming days (which is always a risk after FOMC-induced rallies), Wednesday’s advance looks to have confirmed last week’s reaction lows near 2,040 and now has a measured upside target in the 2,150 area.

However, the February rally and breakout was not confirmed by any meaningful rise in momentum. As such, the onus remains on the bulls to show that the next leg higher can come on better momentum.

TLT Chart
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Bonds rallied hard on Wednesday. The yield on the benchmark 10-year U.S. Treasury note closed back below the 2% mark, and the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) spiked.

The way to try to understand the rally in both bonds and stocks is this: While the word “patient” was removed from the Fed’s vocabulary, it wasn’t an outright hawkish statement. The market is anticipating interest rates will remain low for an extended period of time, which both stock and bond holders like to hear.

While all sectors rose Wednesday, the financials were the weakest of the bunch. I always say that without participation of the financial sector any broader market rally should be taken with a grain of salt. Financials need to begin participating in this rally soon or the market will be at risk of another low-momentum rally that will ultimately fizzle.

KBW Bank Index Chart
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Looking the KBW Bank Index versus the S&P 500, we see that the banks have shown some promising relative strength over the past couple of months. This looks to be able to continue in the not-too-distant future and would also likely be constructive for the broader market in the intermediate term.

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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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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/03/daily-market-outlook-rally-may-fizzle-without-the-banks/.

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