Volume continues to slow in front of this week's Fed decision on interest rates, but that didn't stop the bulls from doing a little buying. The indices did close near the lows of the day but the Dow added 23-points, and the S&P picked up a similar percentage gain of 0.09%. Small caps and the Nasdaq had a good day as growth stocks led, but the Transports were hit hard again for some reason, falling another 1%.
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It's all about the Fed right now, and even though the trading is tentative, there doesn't seem to be too much concern out there. The chances of a rate cut tomorrow is down to about a 19%, but investors seem optimistic that the Fed will remain dovish and at least say the words they want to hear to clear the way for a cut at the end of July.
But what if they say they are going to be data dependent? What if the unemployment rate of 3.6% is too low to initiate a rate cut? What if there is some progress in the trade war between now and the end of July that could keep the Fed at bay? What about if they do cut rates tomorrow and say the economy looks much weaker than we anticipated?
Regardless of what happens, a rate cut may give the market a short term boost of adrenaline, but the reason for the cut could be reason enough for the market to see some profit taking. After all, weak economic data will not be good for corporate earnings, and with stock price / earnings valuations already near historic highs, it seems like we could see some selling of any rate rally.
The yield curve between the 90-day and 10-year yields remains inverted, and despite a little pop recently, the trend is still down, and it is backing off from the top of the descending channel again. This is a recessionary warning and the Fed may also feed on this.
That said, there are some good signs in some of the index charts, while others look to be in trouble (Transportation Index). This may be the summer of being nimble and taking what the market gives you without being overly greedy.
The S&P 500 (C-fund) has created a mini-bear flag (red), but that bear fag looks to be inside a possible larger bull flag (blue). It is still trading below that 2890-something area that has been a bit of a resistance level going back to May. It popped its head above there a couple of times, but has yet to close above it. A bull flag breakout would cure that, and perhaps the Fed can do that this week.
The DWCPF (S-fund) had a big day as this fund continues to have big swings while bouncing around in that bullish looking flag. It remains above the 50-day EMA which is always the bull's friend. As long as it holds, it should be fine, but a break below could generate a lot of selling.
The EFA Chart shows a big loss for the I-fund, but I believe it may be dividend related because the EAFE Index was actually up slightly.
The Dow Transportation Index was hit hard again as it continues to pullback from the 50-day EMA, which has played a key role for the last several months. Since it broke below the average in May, there have been two failed attempts to rally back above it, so the trend is clearly down, which is a different feel from what we're seeing the S&P 500 and small caps. Being a market leader, is this a warnings sign for the S&P 500?
The AGG (Bonds / F-fund) remains resilient, and rather than taking a trip to the bottom of the rising channel (red) it has instead broken above a bull flag (blue), which has so far held as support.
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