I've always liked to look at certain points during a bull market or bear market where the character of the market could change based on key fundamental news. We were at one of those points on Wednesday as 2 o'clock approached. The Fed was about to deliver their latest policy statement and traders were on pins and needles. Questions were swirling about what the Fed might say, and do, given the February Core CPI and Core PPI numbers that were reported higher than expected. The Fed already has squashed the bulls once recently, when they shot down the possibility of a March 2024 rate cut after expectations were building for exactly that. There were still the 3 rate cuts supposed to occur in 2024, but the Fed told us that higher rates would remain a bit longer.
Most traders are not blessed with great patience. Things could have turned ugly this past Wednesday at 2pm ET if the Fed decided to wait even longer to lower rates, possibly cutting the expected number of rate cuts from 3 down to some lower number. And what might happen if the Fed did an "about face" and said something that might indicate they'd have to reconsider hiking again? After all, this Fed hasn't exactly been consistent in its discussion about interest rates.
Well, a lot of that anxiety came to an end on Wednesday as the Fed stuck to its previous guidance, despite the higher inflation reports the week prior. The stock market NEVER performs well when uncertainty is rising, but it generally does quite well when that anxiety is diminished. So at the moment the Fed indicated that nothing had really changed in their view, the stock market screamed higher, with the small cap IWM quickly testing overhead price resistance:
This was the chart I sent to EB members in my Daily Market Report on Thursday. Small caps received the news it was looking for and reacted according - to the upside. But the closing breakout never occurred on Thursday and that false breakout led to some profit taking on Friday. It'll be interesting to see where small caps head this week. Since 1987, the annualized return for the IWM over the next 7 days is 41.20%, more than 4 times its average annual return. This tells us that history suggests a strong week ahead for small caps. But nothing is more important than the combination of price and volume. Before we grow overly excited about IWM's prospects, we need to clear candle body price resistance, currently at 208.21.
Major Index and Sector Rotation
With this new information (basically the same as the old), and with inflation fears subsiding further, where did the money go from Wednesday 2pm ET through Friday's close? Shouldn't we be interested in what the big Wall Street firms were doing with their money after this fundamental announcement? Well, this is what the big boys were favoring after the announcement.
Major Indices
- NASDAQ 100 (QQQ): +1.74%
- Russell 2000 (IWM): +1.73%
- S&P 400 Mid Cap (MDY): +1.55%
- S&P 500 Large Cap (SPY): +1.11%
- Dow Jones (DIA): +0.92%
Sectors
- Industrials (XLI): +1.49%
- Communication Services (XLC): +1.46%
- Technology (XLK): +1.34%
- Consumer Discretionary (XLY): +0.84%
- Energy (XLE): +0.74%
- Financials (XLF): +0.73%
- Health Care (XLV): +0.48%
- Materials (XLB): +0.42%
- Real Estate (XLRE): +0.16%
- Utilities (XLU): +0.05%
- Consumer Staples: -0.08%
Clearly, money rotated and benefited "risk on" areas of the stock market, which is secular bull market behavior. Aggressive sectors led by a wide margin over defensive sectors. Money also returned to growth as most growth vs. value ratios turned higher after Wednesday 2pm ET as well.
Industry Group Rotation
We now know that money rotated in bullish fashion and to more growth-oriented areas, though industrials' leadership and the S&P 500's break to yet another all-time high after the Fed announcement is further evidence of wide participation in this latest advance. And with small caps right up there with the NASDAQ 100, all those breadth arguments can be tossed right out of the window.
Here's what we should take away from industry group performance after the Fed meeting:
- Semiconductors ($DJUSSC) was #1 among ALL industry groups - not too shocking
- The Top 10 industry group performers belonged to either technology (XLK), consumer discretionary (XLY), or industrials (XLI)
- Heavy construction ($DJUSHV) had broken out a few weeks ago and the Fed announcement saw momentum increase significantly within this group
- Trucking ($DJUSTK) bounced off 50-day SMA support and is poised to break further into all-time high territory, a very bullish development for transportation stocks ($TRAN) in general
- Gold mining ($DJUSPM) and mining ($DJUSMG) both saw bullish initial reactions, but then gave back most of those gains by Friday
Big Loser
In my mind, it's once again gold ($GOLD). I think many traders believed that falling rates ahead would trigger a drop in the U.S. Dollar (UUP). Not gonna happen. Any weakness in the dollar of late has been triggered by potential erosion by inflation. The Fed essentially said that inflation isn't a problem, despite the higher CPI and PPI readings recently. Our economy remains quite resilient and unemployment remains low, especially compared to foreign economies. That's why the UUP is strong. Another breakout in the UUP could be at hand:
I know many keep pointing to the recent breakout in GLD, but I want to OUTPERFORM the S&P 500 and the above chart shows you that, outside of a few short-term pops to the upside (blue-dotted directional lines), the overall RELATIVE performance line is going down, down, down in a very big way. No thank you.
A Rapidly-Improving Heavy Construction Small Cap Stock
I was focusing on the heavy construction area ($DJUSHV) this weekend, because of its recent strength and then the surge after last Wednesday's Fed meeting and policy statement. There are a number of stocks that caught my attention, but one in particular that I believe has a LOT more upside given its current technical outlook. I'll be sending it out to our FREE EB Digest subscriber community before the market opens tomorrow morning. If you're not already a subscriber, you can CLICK HERE to sign up with your name and email address. There is no credit card required and you may unsubscribe at any time!
Happy trading!
Tom
