On Wednesday it was definitely all about the Fed. The decision to cut interest rates should have been a positive for investors. This was the first rate cut since 2008 for the markets. Instead Fed Chair Powell comments sent investors to the exits and saw many investors take profits on stocks that had rallied over the past several weeks.
What follows are personal comments. The Fed has become notorious for its inability to understand market conditions and investor as well as consumer sentiment, both at the stock market level and for the domestic economy as a whole. Giving mixed signals has become normal over the past decade but the inability to understand the consequences of verbal comments is a problem that has plagued the Fed for years. Fed Chair Powell is perhaps one of the more ineffective speakers the Fed has contended with. The rate cut on Wednesday was just a quarter of a point which in the big scheme of the economy won’t have much impact. Half a percentage would have been felt. Still, a case could have been made for the quarter point cut to at least signal the Fed was placing interest rates increases on hold and trying to get ahead of any potential for a recession. These would have been seen as positives but instead Fed Chair comments were more focused on how no one should expect further rate cuts this year and indeed the forward guidance was more hawkish than dovish despite the decision to end the Fed’s balance sheet reduction program months early. So on one hand the Fed presented a dovish stance for the current interest rate cut but was hawkish and warning on the possibility of future rate cuts. These comments sunk stocks as Fed Chair Powell bumbled through a press conference leaving behind damage to stock and bond markets and impacting the dollar. All of this happened, despite providing an interest rate cut which should have been bullish for all markets. Part of the problem is the Fed Chair’s decision to try to explain past and future decisions in rambling often incoherent fashion in what Powell believes is a “transparent manner”. But nothing is transparent and where investors and consumers want clarity none is actually provided despite the length of news conferences.
The damage was quick to see as the S&P fell to the 2960 support level, 40 points below 3000 on the S&P. A rally back from these depths quickly faded as the index slipped again to close at 2980, down just over 1% on the day. It was the worst one day drop since late May.
Investing is as much about emotion as it is about fundamentals. Today was an emotional day. Wednesday’s interest rate cut was probably the most highly anticipated Fed event in years. It was, as explained, the first rate cut since 2008. Yet it’s announcement was bungled, leaving investors to take profits due to a cloudy and somewhat hawkish Fed comments that provided no clarity. Tomorrow will probably be emotional as well, but unless something further is said by the Fed, the market will regain its footing. Let’s review the technical indicators from Wednesday’s fiasco.
Stock Market Outlook Chart Comments At The Close on Wed Jul 31 2019
The SPX chart is no longer bullish but it won’t take much to turn it back bullish.
The closing candlestick is quite bearish for Thursday.
The index easily crashed through the 21 day moving average and the Lower Bollinger Band was breached. Often this type of break will be tested again shortly.
You can clearly see the Bollinger Bands Squeeze is underway. Neither the Upper Bollinger Band or Lower Bollinger Band are signaling what the next move will be although the remaining technical indicators, as you will see below, are turning down. We could see a day or two of weakness. In fact weakness could last into Monday of next week if investors turn negative for the next few days.
Meanwhile all the major moving averages are still climbing and the 100 day is almost ready to break above 2900 which will add support to the SPX.
Stock Market Outlook review of Wed Jul 31 2019
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is negative and falling.
- Settings: For momentum I use a 10 period when studying market direction.
MACD Histogram: MACD (Moving Averages Convergence / Divergence) issued a down signal on Thursday July 18. The down signal was a lot stronger on Wednesday.
- Settings: For MACD Histogram, I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9.
Ultimate Oscillator: The Ultimate Oscillator signal is positive and falling.
- Settings: The Ultimate Oscillator settings are: Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months.
Slow Stochastic: The Slow Stochastic signal has a down signal in place for Thursday.
- Settings: For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic tries to predict the market direction further out than just one day.
Relative Strength Index: The RSI signal is falling.
- Settings: The relative strength index is set for a period of 5 which gives it 5 days of market movement to monitor. It is often the first indicator to show an overbought or oversold signal.
Rate of Change: The rate of change signal is falling indicating lower prices are ahead for the index.
- Settings: Rate Of Change is set for a 21 period. This indicator looks back 21 days and compares price action from the past to the present. With the Rate Of Change, prices are rising when signals are positive. Conversely, prices are falling when signals are negative. As an advance rises the Rate Of Change signal should also rise higher, otherwise the rally is suspect. A decline should see the Rate Of Change fall into negative signals. The more negative the signals the stronger the decline.
Support and Resistance Levels To Be Aware Of:
3000 is resistance
2960 is light support
2900 is light support
2860 is better support
2830 is light support
2800 is strong support
2795 is light support
2745 to 2750 is light support
2725 is light support
2700 is light support
2675 is light support
2650 is support
2625 is light support
2600 is support.
Stock Market Outlook for Tomorrow – Thu Aug 1 2019
The bungling of the manner of presentation of the interest rate cut should not impact the market longer-term. Short-term however, the index will be under some pressure.
The technical indicators are all turning lower and the sell signal from MACD continues to be correct in its outlook.
Thursday will be negative for stocks but there is support between the 2960 to 2950 level. On Wednesday we saw the index bounce off the 2960 level. On Thursday any dips down to 2960 or 2950 should be watch for signs of a bounce. In any such bounce I will be buying Spy Calls as the index hits those support levels as I expect a recover bounce attempt, from the debacle of Wednesday.
2900 is light but good support. I would not expect the index to fall that low on Thursday but a drop back to 2960 or 2950 is likely. We should however, see a bounce attempt early on Thursday before the market closes lower again at the end of day. A choppy day is coming up for Thursday.
Wednesday afternoon was an emotional reaction by investors. It will pass shortly.
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