Volatile Markets: All About The Fed, All The Time

Stock markets at home and abroad continued their volatile ways on Friday as investors and traders look to the Fed meeting on Tuesday and Wednesday, the interest rate announcement on Wednesday and, finally, Fed Chairman Bernanke’s Wednesday press conference.

U.S. financial markets have been rocked in recent days by confusion and conflict over what the Fed’s next move might be. In Congressional testimony earlier this month, Fed Chairman Bernanke floated a trial balloon regarding “tapering,” and that was followed on by several Fed Presidents suggesting that it was time to take the foot off the gas pedal of easy money.

Then on Thursday, Wall Street Journal and Fed “deep throat,” John Hilsenrath, wrote an article titled “Fed Likely to Push Back on Market Expectations of Rate Increase” in which he said “an adjustment in the program won’t mean that it will end all at once…and that it “won’t mean that the Fed is anywhere near raising short-term interest rates.” (WSJ)

The article was widely credited as providing additional fuel for Thursday’s rally, however, Friday followed with a down day as investors braced for this week’s Fed meeting.

For the week, stocks posted their third straight weekly loss with the Dow Jones Industrial Average (DIA) losing 1.2% for the week, the S&P 500 (SPY) sliding 1% and the Nasdaq Composite (QQQ) dropping 1.3% on the week.

In other major markets, oil (USO) remained strong as sabres rattled over Syria and gold (GLD) gaining ground.

Treasury bonds (IEF) continued their volatile ways with bonds bouncing off recent lows.

On My Stock Market Radar

While major U.S. indexes put on a volatile show, a close look at the chart of the S&P 500 (SPY) offers a less emotional view of recent action and the current status of the U.S. stock market.


In this point and figure chart of the S&P 500 (SPY) we can see how the index is on a “sell” signal with a downside price objective of 1520, approximately 6.6% from Friday’s closing level.

Strong support rests at 1500 and a break below the blue, bullish support line would indicate the likelihood of a more serious decline.

Close in support and resistance reset int he narrow band between 1640 on the top and 1600 on the bottom and the S&P 500 ( SPY) will reveal its next directional move with a break above or below one of these levels.

Stock Market News You Can Really Use

Focus on the Fed stretches beyond U.S. investors as the IMF on Friday downgraded U.S. growth prospects and Christine Lagarde warned against easing too quickly.

The IMF says that risks to the U.S. economy “appear tilted to the downside” and is projecting growth of 1.9% this year and 2.7% for next year, both down from previous estimates. The IMF continues to fret over the effects of the sequester and too quick a trip towards tapering by the Fed.

Friday’s economic news dampened the session with the University of Michigan consumer sentiment index declining and U.S. industrial production for May coming flat month over month. Capacity utilization fell to 77.6 for May, missing expectations and below last month’s 77.8.

Earlier in the week, good news came from retail sales for May which rose 0.6%, beating expectations, and U.S. weekly jobless claims which fell to 334,000, compared to last week’s 346,000. Small business optimism rose in May while Standard and Poors lifted the U.S. credit outlook from negative to stable.

Next week brings a raft of important economic news:

Monday: June Empire Index, June Home Builders

Tuesday: May Consumer Price Index, May Housing Starts

Wednesday: FOMC Meeting and Dr. Bernanke press conference

Thursday: Weekly unemployment claims, June Markit PMI, June Philadelphia Fed, May Leading Indicators, May existing home sales

Bottom line: Far and away, the biggest stock market driver next week will be the Fed announcement on Wednesday scheduled for 2pm Eastern time and to be followed by Dr. Bernanke’s press conference at 2:30 pm. Stock markets and bond markets around the world will be looking for soothing words from the Fed regarding the future of quantitative easing and will react according to what they hear. It’s going to be a big day and an exciting week as the theme remains “all about the Fed, all the time.”

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