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Bearish Momentum Picking Up Steam

Weekly Market Summary

The biggest story-non-story of the week was the Federal Reserve’s announcement that it was raising its benchmark interest rate by 25 basis points (0.25%) to the range of 0.75% to 1.0%. This was the third interest rate hike in a decade, but the second since December. This seems to signal that the Federal Reserve is moving into a new policy phase, exiting its nine-year-old campaign of economic stimulus following the economic crisis of 2007-2008. The central bank also maintained its forecast for two additional increases by the end of the year. The consensus immediately after the announcement was for an increase during the June FOMC meeting and another when the committee meets in December. Through Friday’s close, the CME FedWatch Tool pegged the probability of a May rate increase at only 6.4%, while the probably of a June increase was 58.2%.

In the near term, the rate increase itself will probably have little impact on the overall stock market. However, some sectors do benefit from interest rate hikes. One sector that tends to benefit the most is the financial industry. The earnings of banks, brokerages, mortgage companies and insurance companies often increase as interest rates move higher because they can charge more for lending. Overall, though, the rate increase is an indication of the Fed’s confidence in the overall economy.

The Dow Jones Industrial Average (DJIA) clawed out a 0.06% weekly win and closed Friday at 20,914.62. It has been 10 trading days since the Dow closed above the 21,000 level and we wonder if this has turned into a near-term resistance point. To the downside, the 20,750 level may offer support, followed by the 50-day moving average at 20,370.73.

The S&P 500 Index (SPX) gained 0.2% for the week to close at 2,378.25. It has been 12 days since the large-cap index traded above the 2,400 level, leaving us to believe that has become a near-term hurdle. To the downside, we see the 2,375 level as near-term support, followed by the 50-day moving average at 2,322.62.

This week, five of the 10 S&P Sector SPDRs posted gains while five posted losses. Real Estate (XLRE) outpaced all sectors with a 1.2% gain as investors shifted money into dividend-paying stocks as the Fed signaled interest rates could stay low for longer than expected, even though it increased rates this week. As a result, Financials (XLF) lagged all sectors with a 1.4% decline.

The broad market Wilshire 5000 (W5000) index again posted a weekly gain of 0.5% to close Friday at 24,761.64. We view the 24,500 level as near-term support for the index, followed by the 50-day moving average at 24,252.40 and round-number support at 24,000.

The tech-heavy Nasdaq Composite (COMP) rose 0.6% this week to 5,901.00. On Friday, the index posted a new all-time intra-day high at 5,912.61. We wait to see if round-number support develops at 5,900notched its sixth consecutive weekly win after rising 0.4% for the week to 5,870.75. The index eased off Wednesday’s record close on Thursday and we will watch to see if the 5,900 level becomes short-term resistance. Below that is the possibility of round-number support at 5,800 and the 50-day moving average at 5.722.87.

The Russell 2000 (RUT) index of smaller stocks outperformed most major U.S. indexes this week, posting a 1.9% gain to close at 1,391.52. It has been 12 trading days since the index traded above the 1,400 mark so we continue to view that as a near-term resistance point. To the downside, we do not have much faith in the 50-day moving average (1,376.60) after it failed to hold last week. However, the 1,360 level offered support last week so we view that as near-term support.

The CBOE Volatility Index (VIX) slid 3.3% this week to 11.28.

Computerized Investing Market Dashboard Indicators

Since the last update two weeks ago, two of the Market Dashboard indicators have triggered new bearish signals, one switching from neutral and the other from bullish. However, none of the Dashboard indicators triggered confirming bearish or bullish signals this week.

To see the current signals of all the dashboard indicators, visit the CI Market Dashboard.

The Market Dashboard is one of the many benefits of Computerized Investing, a service from AAII that harnesses the power of technology to help individual investors become more effective managers of their own portfolios. To learn more about Computerized Investing, visit http://www.aaii.com/computerized-investing/about

 

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