A Slam Dunk…
Stock index futures finished mixed last week
in what was another rather uneventful week of trading. Conditions were
marked with low volatility and little conviction. In fact, volatility levels
are now near multi-year lows. This, of course, can mean many things, from a
lack of interest to complete complacency among market players. The most
noticeable trend of the week was the outperformance of industrial/cyclical
names, such as MMM (which is sad to say!). Meanwhile, chip shares continued to
struggle because of further evidence of excess inventory levels at many
companies. Overall, though, it appeared as if many market players are simply on
hold ahead of the big FOMC meeting on June 30th.
The
September SP 500 futures closed Friday’s session with a gain of +2.50 points,
with the Dow futures tacking on +30 points. However, the 2 contracts finished
the week mixed, with the ES slipping -2.00 points and the YM adding +7 points.Â
On a weekly basis, it’s “same stuff, different week” as both contracts are, so
far, holding their weekly downtrends. Looking at the daily chart, the ES and YM
have both formed pennant patterns and are holding their 10-day MAs.Â
               
^next^
The US
Dollar broke its 10-day MA at 89.34 and could be forming the right shoulder on a
head-and-shoulders pattern, with a neckline break down in the 88 area.Â
September bonds (ZB) are forming a weekly descending triangle after stalling at
the 10-week MA and 50-day MA. The Semiconductor Index (SOX) broke its 10-week
MA, but managed to hold its 2 1/2 year old trend line going back to Oct ’02.
               
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With only 8
trading sessions left before one of the more anticipated FOMC meetings, the
market should be especially focused on interest rates. Currently, it’s almost a
slam dunk that the Fed will raise rates by 25 basis points on June 30th. At
times lately, though, the market has been working itself into a tizzy over
speculation that the Fed could lift rates by 50 basis points. More to the
point, we have seen mixed messages from various Fed officials in past weeks.Â
One day they’re suggesting, in a hawkish tone, that the Fed will do everything
in their power to maintain price stability. The next day, these same officials
have made comments that the pace of rate hikes can be more “measured” in nature.
All this
suggests to me is that just like every other tightening cycle, there is still a
tremendous amount of uncertainty within the FOMC itself on how it plans on
handling the situation. The main concern is acting too aggressively because of
how much debt exists on the consumer level in the U.S. And with a lot of that
debt being of the variable rate variety, the Fed has to make sure they don’t
significantly crimp consumer spending habits due to higher debt servicing
costs. It has been lower debt service costs that have served to overcome
inflationary pressures in the U.S. economy over the last 2 years. Consequently,
if the Fed takes away much of the stimulus low rates have provided, it could
make for a pretty big mess for the consumer down the road. Without question,
Greespan and Co. have their work cut out for them moving forward, with little
room for error.
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Please feel free to email me with any questions
you might have, and have a great trading week!