Thursday, June 19, 2014 9:05 a.m. Before the open
I’m not sure whether the market rallied after Fed chief Janet Yellen’s press conference yesterday was in response to her assurance that interest rates will remain low for a “considerable time,” or the fact she mentioned a few tools that the Fed is considering for its QE exit strategy.
She explained that the Fed has the tools needed to raise short-term interest rates and drain excess reserves from the banking system when it is timely, but will maintain a large balance sheet ‘for some time.”
Yellen referred to several exit “tools,” including the Term Deposit Facility, interest on excess reserves and reverse repurchase agreements, but offered few details.
MY PROBLEM WITH ALL THIS:
Let’s be realistic – interest rates WILL go up, and the Street must accept that, as well as the fact rising interest rates and stock prices can co-exist to a point, as they have in the past.
What’s more, there is some upside to higher rates – income on money market funds, CDs, etc. which would boost the economy, as well as a greater willingness for banks to lend.
There is a real potential here for the U.S. economy to heat up, especially if goosed by economic recoveries abroad, forcing the Fed to raise its benchmark rate sooner than planned.
Caught by surprise, the Street would likely panic, triggering a brief but brutal bear market.
The Street is conditioned to buy every time the Fed assures it that interest rates will remain close to zero for a “considerable time.”
Why not simply say interest rates will be going up in the near future – get used to the idea, adding that it believes the economy can grow with a higher level of interest rates, and give reasons why it thinks so.
I am not concerned about valuations at 16.6 times projected earnings for the S&P 500, I think speculation and higher P/Es are inevitable, but to achieve that under the assumption that can only happen if the Fed sticks to a zero-based interest rate policy is unrealistic.
My concerns noted above are more intermediate-to-long-term focused. I don’t see a “reality shock” near-term. The markets can handle reality, but not when it is delivered unexpectedly.
Yesterday’s late-day rally should give a little back this morning with a test of support at DJIA: 16,842 ; S&P 500:1,948; 4,341.
Investor’s first read– Daily edge before the open
S&P 500: 1,956
Nasdaq Comp.: 4,362
Russell 2000: 1,183
Quadruple Witching Friday looms this week when stock index futures, stock index options, stock options and single stock options expire on the same day. Stock options expire on 3rd Friday each month. All four expire on the 3rd Friday in March, June, September and December.
This even used to have a big short-term impact of stocks, not so much anymore. Even so, “heads up !”
The European Central Bank’s cut of its benchmark interest rate and announcement to employ additional measures to stimulate European economies stands to help the U.S. economy, as well. It did little to boost stock markets abroad which are trading at six-year highs, suggesting the move was already discounted. Even so, let’s consider it a positive.
TECHNICAL ANALYSIS of 30 DOW JONES INDUSTRIALS
At key junctures, I technically analyze each of the 30 Dow industrials seeking a reasonable near-term support and a more extreme support level, as well as a short-term resistance level. By technically studying the balances of buying and selling in each stock, then converting that data back to the DJIA using the “divisor” (0.1557159) I can get a better reading on the average itself. The DJIA is a price-weighted average and subject to distortion by higher priced issues.
As of June 12, the reasonable support for the DJIA is 16,573, the more extreme support level is 16,443 and the short-term resistance is 16,896.
Note: My daily support/resistance levels are more short-term oriented.
THIS WEEK’s ECONOMIC REPORTS:
Look for a heavier schedule of releases on the economy this week, including a press conference by Fed chief Janet Yellen at 2:30 following the release of the minutes from the FOMC meeting Wednesday.
For detailed analysis of both the U.S. and Foreign economies along with charts, go towww.mam.econoday.com. Also included is an explanation of each indicator. If you want to know when the next Employment report or any other key report will be released that info is also there under “event release date.”
Empire State Mfg Ix. (8:30): Hit a 4-yr. high at 19.28 May vs 19.01 in Apr. New orders also hit a 4-yr. hi at 18.36
Industrial Prod. (9:15): May up 0.6 pct. after a drop of 0.3 pct. (revised) in Apr. Capacity utilization is 79.1 vs. 78.6
Housing Mt Ix. (10:00): Index jumped to 49 from 45 in May which is promising, though “traffic” remains in a slump at 36.
FOMC meeting begins
ICSC-Goldman Store Sales (7:45): Sales up 0.4 pct. for the 6/14 week. Year/year is +3.1 pct. vs. +3.0 pct.
Consumer Price Ix. (8:30): Up 0.4 pct. May vs. +0.3 pct. Apr. X-food/energy up 0.3 pct. May vs. +0.2 pct. Apr..
Housing Starts (8:30): Down 6.5 pct. May after gain of 12.7 pct. Apr.
MBA Purchase Apps (&:00): Apps plunged 9.2 pct. in the June 13 week; Refis dropped 13.0 pct. (ugh!)
FOMC meeting announcement(2:00)
Fed. press conference – Yellen (2:30):
Jobless Claims (8:30): Down 6,000 to 312,000 for the June 4 week
Philly Fed Svy (10:00):
Leading Indicators (10:00):
Quadruple Witching Friday
June 2 DJIA 16,717 Decision Time for Stocks ?
June 3 DJIA 16,743 Economy “Must” Accelerate, or…
June 4 DJIA 16,722 Correction in Stocks Without Robust Economic Rebound
June 5 DJIA 16,737 Bulls Must Pick It Up, or Lose the Ball
June 6 DJIA 16,836 Easy Does It ! Dow 20,000, But Not in Straight Line
June 9 DJIA 16,924 Stock Market Breakout – Now What ?
June 10 DJIA 16,943 Greed/Fear Ratio, Not P/Es, Drive the Market
June 11 DJIA 16,945 Watch Trampoline Effect for Stocks
June 12 DJIA 16,843 Sideways, 3-Month Trading Range Beginning ?
June 13 DJIA 16,734 Iraq Crisis to Create Buying Opportunity
June 16 DJIA 16,775 Uncertainty – A Menace t Stock Prices Near-Term
June 17 DJIA 16,781 Decision Day for Stock Prices – Near-Term
June 18 DJIA 16,808 Market Awaits a Fed QE Exit Strategy
A Game-On Analysis, LLC publication
“Investor’s first read – a daily edge before the open”
Investor’s first read, is a Game-On Analysis,LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized investment advice or as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.