Focus Letter

Market Plagued by Fed Fears

Good morning! Despite a positive close on the day, Wednesday was a rough session for the market as a whole. The morning began strongly, gapping up slightly and then morning higher into 15 minute 20 simple moving average resistance. This was also the 5 minute 20 sma on the Nasdaq Composite and Dow Jones Industrial Average, as well as price resistance from the congestion of the prior afternoon's trading range. These factors helped push the indices into a trading range for the first hour of the day.

The early morning range broke higher into 10:30 ET, putting in an equal move on the S&P 500 on the 5 minute charts as compared to the gap move and taking it into the prior afternoon highs before stalling. The Nasdaq ran into resistance at the same time around 10:45 ET when it came into its 15 minute 200 sma resistance. The Dow also hit its prior afternoon highs with this reversal period and all three indices began to pull back. A second attempt at highs on lighter volume into 11:30 ET merely served to trap new buyers who were still willing to take a chance on the market despite the much-anticipated Fed Minutes due out later in the afternoon.

Although the volume on the day as a whole was strong, the mid-day activity slowed a great deal. A very steady selloff began coming out of the 11:30 retest of morning highs and continued until 14:00 ET. Anyone remember the days when the market would see very little, if any reaction to the Fed Minutes? Well, a lot has changed over the past year. These days they can easily generate as much activity as the actual rate change announcements.

If you just look at the 5 minute charts from Wednesday and compare them to a typical Fed announcement day, the type of movement in the afternoon was very similar. Perhaps it was a bit more choppy, with more overlap from bar to bar, showing a little more uncertainty than the announcement days, but overall the interest level appears to be just a high.

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The market sold off immediately following the 14:00 news. A debate of whether or not to raise the fed-funds lending rate at the last meeting versus leaving policy unchanged gives a greater impression in favor of yet another hike in June. At present, those odds are believed to be around 72%. The main concern is that continuing to raise rates in the face of the weakest May for the S&P 500 in 22 years can propel the market back into a bear market on the broader time frames.

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After restesting Tuesday's lows, the market managed to take back its mid-afternoon losses on a strong reaction off the support. This type of whip-lash continued into the close, making another brief run into the last 20 minutes of the day. The Dow gained 73.88 points on Wednsday, the S&P 500 rose 10.25 points, and the Nasdaq Composite climbed 14.14 points. The oil services (+3.1%) and energy (+2.1%) sectors saw the strongest gains, while internet stocks, residential homebuilders, and networkers posted small losses.

Overall, the market is activing like it is going to try to continue to just chop around on the daily charts for the remainder of the week. The plethora of economic reports is part of the reason for this since gains coming from a positive reaction to one release can be easily wiped out by the next. Given the technical aspects of the market action, regardless of how these reports come out, it is probable that May's highs will continue to hold for several months at least. We might see a retest of them if the pace picks up on the buying, but it would be unlikely to push to any significant new high. Any slight new high would just give those who didn't get out last month a chance to bail, while trapping those who believe that every new high the market makes is a buying opportunity. At this point, however, it doesn't yet appear that the market will even try that.