Can Dovish Fed Keep the Dow Jones Rally Going?

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U.S. equities bounded higher on Wednesday, pushing big-cap tech stocks up for the fourth day in a row and for the fifth day out of the previous six trading sessions. All the “FANG” stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — are back above their 50-day moving averages. And recent momentum favorites like Nvidia Corporation (NASDAQ:NVDA) are surging higher as well.

The recent struggle for direction, at least on the surface, appears to have passed. Yet breadth measures continue to erode, suggesting it’s too early to yet sound the all-clear.

In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 gained 0.7%, the Nasdaq Composite gained 1.1% and the Russell 2000 gained 0.8%.

Treasury bonds rallied after hitting some support, the dollar came under pressure, gold gained 0.4% and oil gained for the third straight session, adding 1% as a stockpile draw and reports Saudi Arabia reduced exports in August offset worries about increasing U.S. output.

Breadth was heavily positive, amid a short covering dynamic, with advancers outpacing decliners 3.4 to 1. But volume was light on the NYSE at just 82.8% of the 30-day average. Defensive, yield-sensitive REITs led the way with a 1.3% gain while financials were the laggards, up just 0.1%, on net interest margin pressure. As a reminder, big banks including Wells Fargo & Co (NYSE:WFC) will kick the second-quarter earnings season off with a bang on Friday.

United Continental Holdings Inc (NYSE:UAL) gained 4.7% — boosting the entire airlines space — after reiterating revenue guidance. NVDA got a boost on a positive analyst note from SunTrust. And Twitter Inc (NYSE:TWTR) gained 3.3% on a management addition.

On the downside, Harley-Davidson Inc (NYSE:HOG) lost 3.2% on a downgrade from analysts at Bernstein worried U.S. motorcycle demand is in a secular decline given changing demographics and a sluggish economy.

Turning back to Fed Board Chair Janet Yellen, a lot was made of her comment that interest rates wouldn’t have to rise by much to get back to neutral; a reference to the recent focus on a decline in the natural interest rate as the economy suffers structural headwinds. The odds of a December rate hike plummeted in response.

This was a surprisingly dovish comment in contrast to recent hawkishness from Yellen and her cohorts about extended asset price multiples, risks to financial stability, and the dismissal of recent inflation weakness as transient. If Yellen is truly unhappy with the easing of financial conditions since she started tightening policy in December 2015, today’s response should not make her happy.

Conclusion

The day’s rally brings large-cap stocks back to their mid-June highs. Yet there has been a steady erosion of buying interest as investors focus on fewer and fewer issues as indicated in the chart above of the relationship between new highs and new lows.

Yellen will get another change to module her message when she appears before the Senate Banking Committee on Thursday. And on Friday, we will get updates to retail sales, consumer price inflation, and industrial production data in addition to big bank earnings.

Check out Serge Berger’s Trade of the Day for July 13.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/dow-jones-notches-another-record-on-dovish-fed/.

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