An explosive move in indices expected as Fed’s rate decision is behind us

Commenting on today’s trading focusing on the  Fed’s rate decision, Gorilla Trades strategist Ken Berman said:

While another negative plot twist in the trade war saga could trigger a pullback in stocks, Friday’s events might not influence next month’s high-level talks.

Friday’s late-day dip didn’t change the positive underlying trend in stocks, even though the rally in Treasuries and gold confirmed the risk-off shift, so we could be in for a volatile session on Monday.

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Stocks remained choppy in early trading on Friday, but the major indices all finished in the red, as a Chinese trade delegation canceled a scheduled trip and returned home, sparking a sell-off in risk assets towards the end of the session.

The Dow lost 160 or 0.6%, to 26,934, the Nasdaq was down 65, or 0.8%, to 8,118, while the S&P 500 fell by 15, or 0.5%, to 2,992. Decliners outnumbered advancing issues by a 5-to-4 ratio on the NYSE, where volume was slightly below-average again.

While the week started out on a nervous note, due to the missile attack against the Saudi oil infrastructure, stocks remained very stable throughout the week, even considering the brief turmoil following the Fed’s rate decision.

The price of crude oil registered its biggest daily increase ever on Monday, but the crucial commodity gave back a large chunk of its gains later on.

The extent of the supply distraction proved to be much smaller than initially estimated, and the risk of an open military conflict declined, so the WTI crude contract finished the week below the key $60 price level.

The Fed delivered the expected 0.25% rate cut, while sending a rather cryptic message concerning its future policies, but even in the wake of the three dissenting votes, stocks and bonds barely budged, confirming the positive underlying trends.

The Fed's rate decision was clearly the most important event of the week, but the key economic releases were bullish for the third week in a row, meaning that the soft patch in domestic growth might already be over.

The housing sector provided the largest positive surprises, with the NAHB Housing Market Index, building permits, housing starts, and existing home sales all beating expectations. Industrial production was also much better-than-expected in August, and as the Philly Fed Index beat the consensus estimate as well, the outlook for the manufacturing sector improved too.

On a negative note, Chinese retail sales and industrial production were well below forecast and the Chinese yuan is under pressure once again, casting a shadow on the global economic outlook.

The technical picture continues to support the bullish case, with the most reliable trend indicators all pointing to another leg higher in the advancing long-term trend.

The S&P 500, the Nasdaq, and the Dow are still well above their now rising 200-day moving averages, and the benchmarks are also north of their now rising 50-day moving averages, despite this week’s choppy price action. Small-caps pulled back this following their recent explosive move, but the Russell 2000 is holding on to most of its gains, and the index remains above both its 50- and 200-day moving averages.

The Volatility Index (VIX) had an unusually quiet Fed-week, and it hit its lowest level since late-July on Thursday, before finishing near the 15 level on Friday.

Market internals remain solid, although the pullback in small-caps weighed on most of the key breadth indicators this week following three bullish weeks.

The Advance/Decline line drifted sideways amid the choppy consolidation, but advancing issues still outnumbered decliners by a 5-to-4 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs fell on both exchanges, dropping to 55 on the NYSE and 50 on the Nasdaq.

The number of new lows also declined, falling to 6 on the NYSE and 28 on the Nasdaq. The percentage of stocks above the 200-day moving average edged lower after hitting an almost one-year high last week, but its closing value of 60% is still bullish.

Short interest was stable this week, but compared to the levels seen in August, the total amount of bearish bets remains and the most shorted issues are having a great September in the face of the hostile monthly seasonality. Our recent pick, Accelerate Diagnostics (AXDX) hit a more than two month high, and since the stock still has a short interest of 50% it could be ready to continue this year’s rally.

Revlon (REV) also has a short interest of 54%, and even though the stock is up by 30% this month, it still has room to rally. Albemarle (ALB) recently popped up on the list of the issues with the highest days-to-cover (DTC) ratios, with a reading of 13, and following three bullish weeks, the stock could be ready to further squeeze shorts.

A busy week of economic releases is ahead for investors and apart from the domestic indicators, the European releases could also have a large impact on equities. The Markit Manufacturing and Services PMIs will be out on Monday, together with the Eurozone PMIs, the CB consumer confidence number will highlight Tuesday’s session, the final GDP print is scheduled for Thursday, with the durable goods report, the Core PCE Price Index, personal spending coming out on Friday.

Despite the busy economic calendar, technicals could matter even more. The major indices have been consolidating just below their all time highs, so we soon might be in for an explosive move, now that the Fed's rate decision is behind us. Stay tuned!