Commenting on today’s trading activity, Gorilla Trades strategist Ken Berman said:
The late-day rally that propelled the major indices into the green is a great sign ahead of tomorrow’s crucial session, even as trading activity was very low today. Stocks had a typical pre-Fed-day session, but in light of the rally of the past two weeks, the broad move in the last hour of trading could be a precursor of a major technical breakout.
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Focus on the Fed
While stocks had a slightly bearish morning session, the major indices edged higher in the afternoon and finished near their intraday highs, as the fears of an oil shock eased. The Dow was up 34 or 0.1%, to 27,111, the Nasdaq added 32, or 0.4%, to 8,186, while the S&P 500 gained 8, or 0.3%, to 3,006. Decliners outnumbered advancing issues by a less than 5-to-4 ratio on the NYSE, where volume was well below average.
Apart from the materials sector, which was hit by the pullback in the price of oil, all of the key sectors gained ground today. Financials lagged the broader market due to the slight dip in Treasury yields, while the defensive utilities outperformed thanks, in part, to the normalizing energy markets. Consumer-related issues and tech stocks were also relatively strong, but industrials were weak, despite the bullish industrial production number, as yesterday's disappointing Chinese economic releases continued to weigh on the sector.
Focus on oil trading activity
The price of the WTI crude oil contract plunged back below the crucial $60 per barrel level today after getting close the $65 price level for the first time since May yesterday. Since the crucial commodity got close to hitting the $60 level even last week, the risk of a major oil shock seems much lower today, thanks to the positive news regarding the Saudi infrastructure. That said, according to Saudi and U.S. experts, more and more evidence is pointing to Iran’s direct involvement in the weekend attack, so further hostilities between the two regional powers still can’t be ruled out.
Even though the FOMC meeting will likely steal the show tomorrow, we will have a few interesting economic releases coming out as well. The housing market will be at the center of attention, and following today’s better-than-expected NAHB Housing Price Index the small drop in the number of building permits that analysts expect might be pessimistic. Housing starts are forecast to increase, while the weekly crude oil inventories number will likely have a minor impact on energy markets in the wake of this week’s turmoil.
Powell speaking tomorrow
As usual on Fed days, we expect choppy trading to continue until early tomorrow afternoon, with a surge in trading activity after the Fed’s announcements. The Fed will publish its rate decision and statement at 2 pm EST, but given the uncertainty concerning the Central Bank’s future policies, stocks could remain highly volatile until the end of Chairman Jerome Powell's press conference around 3 pm. Anything else than a 0.25% rate cut would likely lead to wild swings across asset classes, but even a slightly optimistic guidance by the Fed could cause a pullback in risk assets.
The technical picture remains positive on Wall Street in spite of this week’s choppy and nervous sessions, and the major indices continue to trend higher even from a short-term perspective. The benchmarks are all well above their rising 200-day moving averages of 7,659 for the Nasdaq, 2,821 for the S&P 500, and 25,729 for the Dow. The indices also remain above their 50-day moving averages of 2,951 for the S&P 500, 8,061 for the Nasdaq, and 26,609 for the Dow, but the second half of the week could see a spike in volatility.
VIX levels and trading activity
The Volatility Index (VIX) has been remarkably stable this week, amid the surge in geopolitical risks, and although the ‘fear gauge’ did spike above 15 yesterday, it remained well shy of both its 50- and 200-day moving averages. The VIX usually rises ahead of Fed meetings too, so its stability is an encouraging sign for bulls, as the index has been very reliable this year in predicting the general direction of the stock market. So, while tomorrow’s Fed decision could be a game-changer, technicals continue to support the longest bull market in history. Stay tuned!