Mid-week market update: The big macro events of this week hasn’t really moved the needle on risk appetite. The market didn’t react much to the Quarterly Refunding Announcement detailing the schedule of Treasury issuance. The JOLTS report showed slightly weaker than expected job openings, but quits and layoffs declined as well, indicating a general deceleration in the labour market.
The FOMC decision came in slightly more dovish than expected, as the Fed reduced the rate of quantitative tightening a little more than expected. This should reduce any headwind that equities may face from a reduction in banking system liquidity.
As a consequence, market expectations of the future direction of the Fed Funds rate made a slight dovish pivot. The market is still expecting just one rate cut in 2024 that begins in November, but the timing of the second rate cut has been pulled forward from March to January.
Market analysis
The rally in the S&P 500 stalled at its 50 dma, which appears ominous, but unsurprising as volume analysis shows considerable overhead resistance at those levels.
So what’s next? On one hand, the usually reliable S&P 500 Intermediate Term Breadth Momentum Oscillator flashed a buy signal when its 14-day RSI recycled from oversold to neutral. This is an indication of building price momentum that has usually resolved in a bullish manner.
In the short run, the price signals from cross-asset analysis tells a more uncertain story. Both bond prices and the US Dollar, which tends to move inversely to stocks, are in tight trading ranges. Bonds attempted to break upward out of its range in the wake of the FOMC meeting today, but failed. The USD weakened in response to the FOMC decision, but it’s still in its range. I am waiting for breakouts or breakdowns for clues to changes in risk appetite.
While the short-term outlook appears somewhat uncertain, the weight of the evidence indicates suggests that the path of least resistance for stock prices is up. My inner trader remains long the S&P 500. The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
