The driving factor that will move the markets today

Indecision ahead of today’s Fed
meeting resulted in range-bound, sideways action yesterday, but
stocks ultimately closed lower. Small and mid-cap stocks again showed the most
relative weakness. The Russell 2000 Index
(
RUT |
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PowerRating) fell 0.6% and the S&P Midcap
400
(
MDY |
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PowerRating) lost 0.7%. The Nasdaq Composite followed closely behind with a
0.6% loss, but the Dow Jones Industrial Average
(
DJX |
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PowerRating) only dropped 0.2%. The
broad-based S&P 500
(
SPX |
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PowerRating) closed 0.3% lower. Each of the major indices
closed near the middle of their intraday ranges, confirming the lack of
direction.

As we often see ahead of Federal Reserve Board meetings,
turnover dropped in both exchanges. Total volume in both the NYSE and Nasdaq
exchanges came in 22% below their respective levels of the previous day. It was
positive that stocks closed lower, but did so on positive volume. However, don’t
forget that we are smack in the middle of the summer doldrums, a time in which
many traders and investors typically take their annual vacations. Since volume
was among the lightest of all the sessions we have seen this year, one can not
read too much into yesterday’s action “under the hood.” Nevertheless, negative
market internals confirmed the overall weakness in the broad market. In the
Nasdaq, declining volume exceeded advancing volume by a margin of 5 to 2. The
NYSE was negative by only 3 to 2.

Not surprisingly, action was mixed among the individual
sectors and most industries closed near unchanged levels. Although the iShares
Silver Trust
(
SLV |
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PowerRating) has already broken out above its prior high from last
month, the spot gold commodity and the StreetTRACKS Gold Trust
(
GLD |
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PowerRating) has yet
to do so. The Gold and Silver Sector Index
(
XAU |
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PowerRating) advanced 1.1% yesterday,
but GLD is still toying with resistance of its primary downtrend line. As the
chart below illustrates, GLD is definitely at a “make it or break it” level that
should result in a significant volatility expansion over he next several days:

If GLD manages to rally above its four-day high of 65.22, it
should lead to a momentum-driven rally that takes it much higher. However, GLD
could just as easily be good for several points on the downside if it fails to
break out above the downtrend shown above. Either way, you may want to consider
buying or selling short GLD, depending on which way the volatility expansion
takes it.

The driving factor that will move the markets in today’s
session is whether or not the Feds raise interest rates again. This time, Wall
Street is divided on whether or not we will see another quarter-point hike in
the Federal Reserve Rate. We feel that speculating on the market’s reaction to
either scenario is foolish and a waste of time. Instead, we will treat the news
as we always do by trading the market’s reaction to the pending interest
rate announcement rather than anticipating what will happen. Rarely does the
market react in a logical way, so astute traders should lay low on the
sidelines, waiting to pounce in either direction. We are prepared either way,
depending on market sentiment after the 2:15 pm announcement. There still are
not many sectors we like on the long side, but a few leading industries will
quickly emerge if stocks react favorably. Pharmaceuticals (PPH) would likely be
one of them. As for the downside, the broad-based ETFs of the small and mid-cap
sectors (IWM and MDY) should be among the first to fall if the broad market
tanks.

Open ETF positions:

 

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