Markets Continue Push Lower as Fed Li...
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Jun
5
Richard Cox
Markets Continue Push Lower as Fed Likely to Remove Stimulus
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The S&P 500 is seeing one of its biggest moves lower this year as investors continue to position for more definitive announcements from the US Federal Reserve, indicating monetary stimulus is no longer necessary to support the economy.  While still largely uninspiring, macro data has shown that economic conditions continue to stabilize and that a broader recovery remains in place.  The latest indication of this came with Wednesday’s Beige Book release, which showed that 11 of 12 Federal Reserve districts are experiencing “modest to moderate” growth.  Some of the strongest industry areas were seen in manufacturing, construction, and business services.

The encouraging elements extended into the labor markets as well, with hiring rates in several districts showing marked improvement.  Most districts saw gains in generalized consumer spending and automobile sales.  This bodes well for the employment data to be released later this week and re-ignites the expectation that the Fed will begin to slow the pace of its bond-buying programs.   At this stage, the some of the analyst community is expecting the Fed to begin slowing its third round of quantitative easing as early as September.  A scenario like this would likely mean that downside corrections will be seen in stock prices, and that this year’s valuation highs have already been seen.

Non Farm Payrolls  

A critical element to watch will be the performance in labor markets, and Friday’s Non Farm Payrolls will be a key indication of the current strength present in this area.  Early estimates called for a monthly increase of 168,000 new jobs (after 165,000 new jobs seen in the previous month).  Some of these expectations have been revised lower, however, as Wednesday’s ADP employment report showed pronounced weakness (at 135,000 new private sector hires).  The NFP release will determine the direction of this week’s close in stocks, so many traders are likely to remain on the sidelines until the figures are made public.

Chart Perspective  

S&P 500:  

#epm3daily

The S&P 500 remains contained within its long term uptrend channel but prices are coming close to trendline support and we are now seeing a lower series of highs on the short term charts.  This suggests a downside break remains a strong possibility and any moves through psychological levels at 1600 make the index a sell on rallies.  We have some significant event risks on Friday, so we will see a technical break (or a bounce off of uptrend channel support) in the next few trading sessions.  The next impulsive move is critical and will likely determine the trend direction for the rest of this month.

Dow Jones Industrials:

#ymm3h4
The Dow Jones index is also posting some strong short term declines and the next target to the downside can be found at 14,800.  This area marks the 61.8% Fib retracement of the late April rally, so this area can be used as a basis for short term buy entries in the index.  Stops should be kept tight, however, as any bearish breaks will signal a full retracement of that previous rally will be seen.



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