Market Alert - The Close

The FOMC gave the market likely more than it expected. Hence the issues post-release of the 25BP hike coupled with a relatively specific plan for reducing its balance sheet by $600B starting relatively soon.

Stocks were flat-ish heading into the FOMC decision, chewing on some really weak economic data from retail sales to prices.

Retail sales, May: -0.3% vs 0.1% vs 0.4% April. Biggest drop in 16 months.

Ex-autos: -0.3% vs 0.2% vs 0.4% (from 0.3%)

Control Group: 0.0%

Electronics -2.8%, gasoline -2.4%, department stores -1.0%. Weakness all round!


CPI: -0.1% vs 0.0% vs 0.2% prior.
Year/year: 1.9% vs 2.2%
2 of 3 months down.

Core: 0.1 vs 0.2 exp vs 0.1.
1.7% year/year, weakest since 2/15

But, the Fed said it views this pricing weakness as transitory, that cell phone costs fell along with fuel, and these will not last says Ms. Yellen. Okay, but everyone knows there is inflation. A box of cereal costs the same (or more) yet the ounces are less. Manufactured goods are made of thinner steel -- but cost the same. The 'silent' inflation is rampant in the economy and is not picked up at all by the government's price measurement methods.

That weak data didn't help, it didn't hurt. If traders were upset by the morning shooting of congressional republicans or the later 'postal' situation at a west coast UPS distribution center, they did not show it. If the data was disappointing, they appeared more interested in the FOMC statement that afternoon.

So, stocks were basically flat heading into the FOMC. They initially jumped, then dumped to the last hour. The bids, however, returned, and by the close the indices rebounded with DJ30 even pushing positive, and of course, to a new high with that positive close.

SP500 -2.34, -0.10%
NASDAQ -25.48, -0.41%
DJ30 46.09, +0.22%
SP400 -0.43%
RUTX -0.59%
SOX -1.06%

Financial stocks appears to like the FOMC result as being more hawkish and thus bullish for interest rates. Those stocks performed well. Indeed, TCBI looks great after a short test as does BAC.

Tech was heavy before and after the Fed, but they managed to come off the lows and at least live to fight another session and try to fix their patterns. The action was good enough on the rebound to let them continue working, particularly 1) after an FOMC decision that typically breeds volatility, and 2) the plunge protection team going to work Friday to blunt that sharp selloff. As long as they hold support, the upside is not out of the picture.

Oil stocks were lower after looking better. Many, however, still look good, e.g. ATW, CVX, NBL. Others not so much and the whole group has to show it can move up and hold a move.

Manufacturing, construction, materials had looked so good then looked so weak Wednesday. EXP, MDR, MTW all flopped around like a carp thrown on the hot pavement. This could mean a few things. One, there is no sticking rotation after an initial notion to move that direction. Two, it was just an off day and they are still going to be sought, though the action Wednesday was hardly encouraging. If the first, then will money go back to the recently turned over leaders (e.g. FANG, chips, big techs)? That wasn't the case Wednesday. If not, then just the financials? That is a pretty narrow group to lead.

The point: Areas that looked ready to be the heirs apparent to the FAANG, chips, big techs and the like suddenly looked as if they were renouncing the thrown. The FAANG, chips, techs and other leaders really didn't look as if they were all that fired up to move higher either. That leaves the market with not a lot of upside leadership and a lot to prove whether it can continue higher. Yes the financials look much improved, but are they enough, and you also have to ask, given the performance of manufacturing, materials, etc., will the patterns hold up even if they do look good right now?

Thus we didn't buy anything, trimmed just a few positions, and basically let positions sort through what the Fed just did. The Fed gave the market more than it expected in terms of news, and thus the true reaction may very well be delayed until Thursday once the market has fully sized up the Fed's move vis- -vis the weak economic data.

We did book some nice gain on the Amazon June options given expiration's proximity and a somewhat problematic pattern. For the rest, we will see if there is any upside left in the chips and company once the Fed balance sheet reduction facts are absorbed.

Until then, we cannot resist looking at some of the financial stocks because they do look quite good -- just as the manufacturers, materials, construction and other 'old economy' sectors looked until today.

Have a great evening!


Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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