Weekly Market Forecast: All Eyes on the Federal Reserve Meeting
Equities started last week with a 1.09% rally but falling short of record highs reached in the middle of August.
Tuesday the rally continued higher on weak volume before slowing down on Wednesday and Thursday.
Friday was all about the quad-witch expiry. Read more about the quad-witch here.
Markets managed to erase the Friday weakness and close on fresh record highs just shy of 2,500.
Here is a snapshot of the previous week’s price action in the SP500:
Oil Prices Rocket Higher, Gold and Other Risk Assets Sell Off
The big winner of the week was oil, adding over 4.6%. Prices ran directly into overhead resistance at $50.10, and are looking like a bearish opportunity for the next couple of days.
Here is last week’s scorecard:
- Oil rallied 4.6%
- SP500 traded 1.57% higher into fresh highs
- US dollar added 0.57% as it ran buy stops from an overcrowded short trade
- Gold sold off 2.18% as we discussed in last week’s webinar
- Silver sold off 2.35%
Russell 2000 and Nasdaq Futures Show Divergence from SP500 Index
Despite the SP500 hitting fresh highs last week, the Nasdaq did not. The smaller cap stocks in the US measured by the Russell 2000 index failed to make new highs as well.
This is a clear divergence in the market that must be followed this week.
If the Nasdaq index and technology stocks continue to trade weaker, they will eventually drag down the much larger SP500 market. Rallies on low volume and with diverging markets are not to be trusted exclusively.
FAANG Stocks Divergence and YTD Comparison to Equity Indices
The major reason for the Nasdaq not making fresh highs along with the SP500 is that FAANG stocks are having a hard time hitting new highs this year.
Institutional portfolios are flush full of these big name tech companies, and have used the recent market strength as an opportunity to quietly sell some of their positions to take profit.
The institutional selling has cooled down the red hot technology sector, but it has still vastly outperformed the broad market.
Here is a chat of the FAANG stocks (candles) vs the Nasdaq index (purple) and the SP500 index (green):
- Facebook, Apple, Amazon, Netflix and Google combined are up 28.41%
- Nasdaq is up 23.12%
- SP500 broad market index is up 11.68%
Overall, the last few years the equity markets have been led higher by the technology sector.
But is this same sector also signal the beginning of the big pull back?
Next Week’s Economic Events and Fed Announcement
This will be a very busy week, full of key economic events.
Expect the crowded calendar to cause market volatility and some range bound action. Don’t let it frustrate you. Recognize the chop and use it as opportunity for high probability range trades.
Last week we saw some signs of stronger inflation out of the US, however, not a meaningful amount considering the Fed has hiked rates significantly in the same time period.
The big events of this week for the US is the Federal Reserve Announcement:
On Wednesday at 2PM we will see the latest Federal Reserve economic projections, along with the official statement.
Traders are pricing in a 98.6% chance of a rate hike. It’s a done deal at this point.
The rate hike is not the important factor on Wednesday!
I will create a full analysis article on what to expect by Tuesday.
In the meanwhile, this is what traders are watching for during the minutes at 2PM and press conference at 2:30PM by Janet Yellen:
- What do Fed members think about the lack of inflation?
- What is the outlook for future rate hikes, any clues for December?
- More details on the massive balance sheet unwind, with some specifics expected at this meeting or next at latest
- Update on the labor market conditions and is the recent weakness making them more likely to pause their rate hike cycle earlier than expected
Overall, be very careful trading the Fed event this week, as there is an opportunity for a significant amount of volatility to be present. Keep a close eye on stocks, bond and the yield curve shift. (We’ll cover this in our article this week).
Weekly Market Sentiment
It’s hard to get long into a record high market on weak volume. Add in the fact that some significant divergences are showing up, and I think the risk is on the long side.
We expect to see equity prices start to stall out above 2,512 on the SP500 and some short side opportunities to arise. This week could also be a low risk opportunity to get long gold.
Overall, here is our sentiment for the week:
- Equities – sell rallies with small size, add on the way down
- Gold – buy dips to support with small size, add on the way up
- US Dollar – neutral, range bound chop
- Oil prices – sell near the $50.10 resistance and cover if we break above $50.90
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Have a great week – and always focus on managing risk first!
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