U.S. equities moved higher again on Thursday ahead of Friday’s options expiration session. But the action was choppy, with a morning excursion into negative territory and not one, but two, intraday selloffs toward the unchanged line.
With the big rate hike decision from the Federal Reserve looming on Sept. 17, traders are just unwilling to make big directional bets ahead of what could be the first interest rate hike since 2006.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 Index went up 0.5%, the Nasdaq Composite shimmied up 0.8% and the Russell 2000 finished the day 0.4% higher.
Commodities enjoyed a lift, with gold rising 0.7%, while crude oil gained 4% despite more reports of inventory accumulation. Technology stocks led the way with a 1%, gain while utilities were the laggards, falling 0.2%.
The big catalyst of the day were cautious comments from Appaloosa’s David Tepper — a well-known hedge fund manager — who told CNBC that he cannot consider himself a bull in this environment.
He suggested now would be a good time to take money off the table, and that stocks would have to fall 20% from here for him to be a buyer. His argument was based on concerns surrounding profit margins, earnings estimates and valuation multiples — saying these were more important, in his mind, than what the Fed does next Thursday.
The other big development was the downgrading of Brazilian debt to “junk” status by Standard & Poor’s (famous for downgrading the U.S. Treasury below AAA status in 2011) amid a faltering economy and unfruitful efforts by its government to fix its fiscal standing. The iShares MSCI Brazil Capped ETF (EWZ) lost 1.5%.
Analysts are worried about knock-on downgrades of countries like Russia, South Africa, Turkey and Columbia, as emerging market currency volatility continues to be a problem.
Technically, stocks are in stasis ahead of the Fed decision next week — forming a dangerous looking “bear flag” pattern that, if confirmed, would setup a retest of the recent Black Monday lows.
This underlying weakness can be seen in the growing list of Dow component stocks that are rolling over again following the vicious short-covering rebound seen in late August. Just look at Caterpillar (CAT), shown above.
Societe Generale’s Aneta Markowska warned clients today that no matter the Fed’s decision next Thursday, the outcome won’t be dovish, given that as far as the economic data is concerned, the conditions for rate liftoff have already been met.
Consider the following:
- The unemployment rate stands at 5.1% vs. the Fed’s year-end forecast of 5.2 to 5.3%.
- The economy bounced back to a 3.7% growth rate in the second quarter, and is on track to be revised upwards to 4.1% based on more recent data.
- Core inflation has stabilized recently (we’ll get fresh data on this on Friday).
With the futures market only assigning a 28% probability of a rate hike next week, the start of a tightening campaign would come as a surprise — and surely rattle stocks. But Markowska warns that even a “no hike” decision could be hawkish, believing the Fed will be forced to acknowledge recent progress in the job market, and all but confirm an October rate hike.
Aside from liftoff timing, she believes Fed policymakers will stick to their guns on four anticipated rate hikes next year, as revealed in the updated Summary of Economic Projections or “dot plot” chart. Currently, the futures market is only looking for three hikes next year.
In her words:
“the only dovish scenario relative to market expectations would be a no-hike outcome with the majority of the dots moving to the 0-0.25% bucket for [year-end 2015], essentially taking a rate hike for this year off the table. This is very unlikely in our view.”
That’s because “it would be difficult to justify postponing the lift-off by six months in the context of the cumulative improvement in the labor market,” as well as the risk such a move would “significantly undermine the public’s confidence and thus prove counterproductive.”
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