Stocks Fall Ahead of Federal Reserve Meeting
Stock markets closed lower into the end of the week, as a reversal in sentiment is leading investors to pull their long positions before next week’s very important monetary policy meeting at the US Federal Reserve. The S&P 500 showed a negative weekly performance for the third time in the last four weeks as it is becoming increasingly likely that the Fed will indicate end approximate ending date for its third round of quantitative easing (QE) stimulus. Without this added stimulus support, investors will react to downward revisions in coporate earnings estimates and this could easily lead to a major pullback in stock values from their recent all-time highs.
The next major event risk in these markets will be seen at the conclusion of the Fed’s interest rate decision. While no change in interest rates is expected, there is a significant possibility that the Fed will announce reductions in its monthly purchases of Treasuries and mortgage backed securities (currently seen at a combined total of $85 million). No announced change to the current stimulus programs will be viewed as a positive for stock markets and likely keep valuations supported through the month of June. Conversely, a larger than expected reduction in monthly asset purchases will be viewed negatively and lead to downside extensions in the Dow Jones Industrials and S&P 500.
The S&P 500 has displayed some upward changes in volatility this week, with prices now pressuring support just ahead of the psychological levels at 1600. We are still holding in the uptrend channel that began last November, but any additional downside moves from the current levels should break that channel and put the focus back on the downside. Watch 1600 as the key line in the sand, if we see a clear break and daily close below here, the index becomes a sell on rallies. To the topside, first resistance comes in at 1645. A bullish break through here suggests a new all-time high will be posted.
The FTSE 100 saw even larger moves lower (when compared to the S&P 500), with this week’s bearish close coming within striking distance of historical support at 6160. Given the size of the latest downside retracement, some bounce is expected at current levels (with short term indicator readings solidly oversold). Stops should be kept tight on any long positions, however, as a clean break of 6160 would be a very bearrish even and keep the long term focus on the downside. First resistance comes in at 6345.
The DAX was one of the better stock performers of the week, bt prices still fell to the “resistance turned support level” at 8095. This level will be key in determining next week’s bias for the DAX. a strong bounce off of 8095 puts the focus back on resistance at 8140.