Trading Places with Tom Bowley

Fed Hikes Rates, But No New Hike Expectations Revealed

Market Recap for Wednesday, March 15, 2017

The Federal Reserve's latest policy meeting has come and gone.  As expected, the FOMC announcement at 2pm EST indicated that rates would be hiked another quarter point.  But the real question was whether the Fed would turn more hawkish on future hikes.  They did not.  They maintained their cautiously optimistic view of the economy in 2017 and stuck with their previous forecast of three rate hikes in 2017.  That simply wasn't enough to trigger a breakout in the 10 year treasury yield ($TNX) as the current yield range from 2.30%-2.62% was maintained as you can see below:


The failure of the TNX to clear 2.62% left financial stocks vulnerable, especially banks ($DJUSBK) and life insurance ($DJUSIL) as both of these industry groups benefit from a rising rate environment.  Sure enough, eight of the nine sectors enjoyed the Fed's latest move, while financials (XLF, -0.16%) were the only sector to lose ground yesterday.  The defensive part of financials - the REITs ($DJR) - soared, however, as they represent a safety net for investors when treasury yields fall.  The DJR is featured below in the Sector/Industry Watch section below.

Pre-Market Action

The bulls are back at it this morning with Dow Jones futures up 56 points with just 30 minutes left to the opening bell.  The Hang Seng Index ($HSI) soared overnight, rising more than 2% to clear its closing resistance of 24200.  Europe is also bullish across the board with gains mostly near the 0.50% level intraday.

Crude oil ($WTIC) has risen back above the $49 per barrel level as energy shares (XLE) could be poised to extend its leadership from Wednesday.

Current Outlook

Another bull market rally was felt in the U.S. yesterday after the Fed left its position on future rate hikes unchanged.  Immediately after the announcement, stocks jumped and didn't let up.  Futures this morning are continuing that upbeat tone.  Here's the afternoon advance on the S&P 500 as reflected on a 2 day, 10 minute chart:

Our major indices are overbought, but in a bull market overbought can remain overbought as we have been witnessing.  As we advance, I like to keep an eye on what's leading the rally.  I want to see consumer discretionary lead staples, transports lead utilities and small caps lead the benchmark S&P 500.  We saw that on the post-2pm EST advance with the exception of the outperformance of transports.  That can be explained in the very near-term as treasury yields failed to break out above key resistance at 2.62% and utilities clearly were a major beneficiary of that failure.  The TNX pattern remains very bullish, however, so I'd look for the $TRAN:$UTIL ratio to advance when the TNX ultimately makes that breakout.

Most signs remain quite bullish for this bull market to continue, although a 4-5% healthy pullback could literally arise at any time.

Sector/Industry Watch

Utilities (XLU, +1.61%) and REITs ($DJR) typically benefit when treasury yields fall as they're big dividend payers and their dividend yields become very attractive to those investors seeking income over capital appreciation.  While yesterday's downturn in the TNX lifted those stocks on Wednesday, there are technical hurdles ahead for the DJR.  The following is a weekly chart that highlights both key support and resistance levels to watch:

The uptrend remains in play and I view the 310-315 area as critical support for REITs.  Initial resistance is the earlier 2017 high near 355 while the longer-term price level to clear is 2016 summer high close to 380.

Historical Tendencies

On the small cap Russell 2000 index, March has finished higher than it began 21 of the last 28 years and has produced annualized returns of +18.44% - exceeded only by the very bullish month of December.  December has risen 25 of the last 28 years and produced annualized returns of +38.49%.

Yesterday's solid small cap gains (+1.50%) nearly erased the RUT's month-to-date deficit.  Look for more strength ahead in the second half of March for small caps.

Key Earnings Reports

(actual vs. estimate):

DG:  1.49 vs 1.41

(reports after close, estimate provided):

ADBE:  .72

Key Economic Reports

February housing starts released at 8:30am EST:  1,288,000 (actual) vs. 1,270,000 (estimate)

February building permits released at 8:30am EST:  1,213,000 (actual) vs. 1,270,000 (estimate)

Initial jobless claims released at 8:30am EST:  241,000 (actual) vs. 240,000 (estimate)

March Philadelphia Fed Survey released at 8:30am EST:  32.8 (actual) vs. 30.0 (estimate)

Happy trading!

Tom

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