(Marco Bonelli) Maybe if you throw it against the wall and jump on it, the Fed Minutes will produce a different message...
The sickening addiction of the market to anything that smells like stimulus lead to quite some buzz ahead of the release of the Minutes. Why should anything materially different get released than what the market already knows from the FOMC statement and Ben Bernanke's press-conference from June 20? Nevertheless, there were three interesting points in the headlines:
1) Most members only see more stimulus action needed if the economy worsens (only two supported immediate action);
2) The FOMC sees a "possible significant slowdown" in China and
3) The FOMC sees "unusually high" uncertainty for jobless and growth. All three points are negative for the market, most of all, the stimulus junkies might get disappointed again at the end of the month as the Minutes don't suggest any QE3 action in the immediate future. (Still, a well-known commentator from the WSJ highlights the "possibility of developing new tools", a phrase that will most likely pose as source for multiple 3.45pm "Fed-leak" rumors over the next couple of weeks!)
At least the comeback rally in the last 20 minutes yesterday was not based on any of these rumors; it was most likely some short-covering in reaction to the 50day MA in the SPX at 1336 (yesterday's low was 1333.25) but also the 50day MA in the Nasdaq Composite at 2884.60 and in the NDX at 2576. With no perspective for longer than 24 hours, the moving averages are once again welcome levels for active traders but give little substance for future market direction. The Dow Jones, NDX and S&P400 broke both, 50day and 100day MA while the Value Line Index even broke below all moving averages, including the 200day. Also worth noting is that the Russell 2000 and small-caps in general showed the second day of underperformance after this group took the lead in short-lived rally end of June, beginning of July. With the Russell 2000, like most other major indexes having made lower highs over the last three month, it also fell back into the downtrend from April, one of the many technical resistance levels.
More important for the future market direction is probably the Dollar. The DXY Index broke out of it recent high from beginning of June (83.54), having now advanced 6.6% since beginning of May. In past years the remarkable inverse correlation between the Dollar and the SPX was only interrupted in the time from November last year until middle of January, when signs for a more sustainable economic recovery of the US economy lifted both, the stock market and the Dollar. Times have definitely changed since then and the enthusiastically celebrated recovery gets threatened to be drowned by various global forces. Bottom-line a continued rise of the Dollar generally doesn't bode well for stocks!
Ahead of JPM's Q2 earnings tomorrow morning and China's Q2 GDP and industrial production and retail sales for June (all to be released tonight), we might see a nervous trading session around the moving averages as it's not worth getting excited about the lowest weekly jobless claims since March 2008 since last week's holiday interrupted week probably didn't see the full extent of claimants running to the unemployment agencies.
Trade well.
(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)
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