Stocks Rally as the Fed Remains Extremely Dovish in Their Rate Policy

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Key Points

  • Dovish Fed Comments Send Stocks Higher on the Day…
  • …Along With Inflation Protection
  • Breadth Metrics Are Mixed This Week
  • Large Cap Leadership in Focus on a Big Night of Earnings
  • Futures Point to a Lower Open Today

Key Chart – Invesco S&P 500 Equal Weight ETF (RSP)

The Invesco S&P 500 Equal Weight ETF (RSP) continues to lag the SPY as the largest stocks in the market remain leadership. The fund has yet to test the highs from June and the OB / OS Indicator is moving lower in an overbought position. Tonight could be key for the equity market as we will hear earnings reports from GOOGL, AMZN, AAPL and FB. Should these large leaders move lower after their reports, there is scope for SPY to test the support zone in the $300 – $310 range in the days / weeks ahead.

Weak Value Stocks

The Fed’s comments yesterday were another datapoint in our view that economic growth remains scarce, which favors outperformance on the part of growth stocks. This week we screen for the stocks that could exhibit weakness in that environment. Starting with the “Value Stock” universe, we look for names that are Very Bearish or Bearish, Overbought, Below a Falling LT Trend Line with Weak Money Flow and Relative Strength.

The screen returned 41 that are likely to underperform the market in the weeks and months ahead. 

*Note that screen is as of yesterday. 

Pre-Market Movers

Advancers: APA (11%), QCOM (11%), UPS (9%), HBI (8%), QRVO (7%)

Decliners: NOW (5%), HES (5%), LB (4%), PPC (3%), WEX (3%)

Market Commentary/Looking Ahead

US equities finished higher on Wednesday on the heels of a continued dovish tone from Fed Chairman Powell. All sectors closed in the green led by Energy and Financials; Staples and Utilities lagged. Treasuries were mostly stronger with the curve steepening. The dollar was weaker versus the major currencies. Gold finished up 0.5% for an eighth straight day of gains. WTI Crude closed 0.6% higher.

With Chairman Powell reiterating his view that the Fed is not thinking about raising rates, our view that inflation is likely to be an aspect of the market environment going forward remains in play. The iShares Tips Bond ETF (TIP) agrees with us as the fund made a new 52-week high yesterday. TIP has a bullish rating and the OB / OS Indicator is moving higher with room to overbought levels while Chaikin Money Flow is bullish. 

S&P futures are down 0.9% after Asian markets were mixed overnight. Japan, Hong Kong and China all finished lower. European markets are under pressure. Treasuries are stronger with the curve flattening. The dollar is stronger on the major crosses. Gold is down 0.5% after finishing up for an eighth straight session on Wednesday. WTI Crude is down 1.5%.

Looking at Market Breadth 

S&P 500 Breadth

The Advance / Decline Line for the S&P 500 is near the highs seen earlier this year as the index continues in the consolidation that has been in place since early June. This datapoint strengthens the case that the February highs for the index are likely to be reached, in line with our prevailing view on the market from a trend perspective.

The percentage of stocks in the S&P 500 that are currently on MACD sell signals now stands at 32%, up from 18% last week, and has turned up in the near-term while the percentage of stocks on buy signals has turned lower. Both of these indicators have flashed a bearish divergence relative to the index. 

The percentage of stocks trading above their respective 200-day moving averages is 54%, from 51% last week. When the index made its June high, this metric was over 60%. The current reading is a bearish divergence. Since 2011, when this metric is above 50% and the index is above the 200-day moving average, the market has been higher six months later 77% of the time. The median return has been 5.56%.  

The percentage of stocks in the S&P 500 currently above their respective 50-day moving averages is 74%, from 79% last week and has also left a divergence on the chart. Since 2010, when this indicator crosses below 75% and the index is above the 50-day moving average, the S&P 500 is higher three months later 74% of the time with a median return of 3.11%.

When we look at the percentage of stocks above their respective 20-day moving averages, we can see the reading moved to 80% this week from 88% last week. Since 2010, when this metric crosses below 85% and the index is above the 20-day moving average, the index is higher one month later 75% of the time for a median gain of 1.90%. The current level is lower than what was recorded in early June. 

The percentage of stocks which are holdings of the SPDR S&P 500 ETF (SPY) that have a Very Bullish or Bullish rating at Chaikin Analytics currently stands at 34.2%. This metric is above the average reading over the past five years (center red line). Bands are set 2 standard deviations above and below the average. 

Global Markets

The iShares MSCI ACWI ex US Index Fund (ACWX) remains above the 50 and 200-day moving averages. Thus far, the RSI is holding bullish ranges after becoming overbought during the rally from the March lows.

Takeaway: The breadth metrics that we track for the S&P 500 were mixed over the past week while some divergences remain in play. The percentage of stocks in the index which are rated Bullish in our model has reached a level that has led to near-term choppy trading in the past. This is in line with the view that the short-term is likely to be mixed for equities. Our view from a trend perspective continues to focus on holding support in the 3,000 – 3,100 which keeps the odds of a test of the February highs elevated.  

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Disclaimer

Disclaimer: Chaikin Analytics LLC is not registered as a securities broker-dealer or advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Chaikin Analytics does not recommend the purchase of any stock or advise on the suitability of any trade. The information presented is generic in nature and is not to be construed as an endorsement, recommendation, advice or any offer or solicitation to buy or sell securities of any kind, but solely as information requiring further research as to suitability, accuracy and appropriateness. Users bear sole responsibility for their own stock research and decisions. Read the entire at www.chaikinanalytics.com/disclaimer

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