StockDesk Wednesday Update: Pullback ...
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May
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Richard Cox
StockDesk Wednesday Update: Pullback in S&P 500 Ahead of FOMC Meeting
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Stocks are showing a slight pullback as investors square positions ahead of today’s interest rate decision from the US Federal Reserve.  No change in rates is expected, so most of the focus will be placed on the accompanying policy statement that will be released at the conclusion of the meeting.  The potentially market-moving area would be seen if any changes are made to the pace of its bond purchasing stimulus program.  Any evidence that the Fed is concerned with recent macro data will actually support stock values into the end of the day, as it will imply that the Fed will be forced to hold its accommodative stance until substantive improvements are seen.

The end of the week will be very important for market sentiment through the rest of May, as we will also have an interest rate decision from the European Central Bank (ECB), and critical macro data in the monthly Non Farm Payrolls report.  The ECB decision tomorrow is likely to end with a 25 basis point rate reduction (to 0.5%).  If this reduction does materialize, it will add to the positive market sentiment and be especially supportive for European stock indices (such as the German DAX and the French CAC).  In both cases (the decisions from the FED and ECB), investors will be looking to see the extent to which central banks will be open to extending supportive monetary conditions.  If we see a positive result, there is an increased chance we will see a positive performance in global markets for the month of May.

Non Farm Payrolls to Guide Friday’s Close  

While corporate earnings have been the main story the last two weeks, the focus this week is clearly centered on central bank policy and macro data.  Friday will see the monthly US Non Farm Payrolls report, which is expected to show an increase of 148,000 jobs for the month of April (after the very weak 88,000 print that was seen for March).  Early indicators are showing potential for a weaker result, however, as this week’s ADP data (which measures jobs increases in the private sector) rose by only 119,000 jobs.  This is the smallest result since September, so it is likely we will start to see downward revisions in the expectations for the NFP data on Friday.

Chart Perspective

S&P 500:

#epm3h1

The S&P is showing a small pullback after making new all time highs in the low 1590s.  These incremental increases now suggest that real resistance is now seen at the psychological 1600 figure but the slowdown in momentum shifts the bias toward a sell on rallies.  Bulls looking to re-enter the uptrend should wait for a test of support at 1570, which is the 38.2% Fib retracement of the rally from 1530.

DAX:

#fdxm3daily

The longer term picture in the DAX remains supportive after prices found strong Fib support at 7410.  The next upside target on the daily charts is seen at 8080, and this can be used as an acceptable area for contrarian sell positions.

 

 



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