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The markets seem to be locked into this low volume, sideways to slightly higher trading range. I say slightly higher because of the last few days, but we could easily give that back at any moment. The bears can't seem to gain control, but the bulls aren't really very enthused either. SPX managed to gain one dollar today, closing at $2124. RUT closed up $3 at $1296. Volatility continued to contract with the VIX losing half a point to close at 12.2%. Trading volume remains below average with 1.8 billion shares of the S&P 500 trading today. Trading volume was roughly flat on the NYSE and NASDAQ, declining about a half a percentage point on both exchanges.
Durable goods orders were disappointing once again with a decline of 1.8% for May, slightly better than the 1.5% decline in April. But this is going in the wrong direction! Our economic data on manufacturing, services, and employment remain weak. New home sales increased in May to an annualized 546 million. This is the highest level since 2008 - one more positive sign for the real estate market.
This latest push higher in the markets has been led by the small-caps and mid-caps. In and of itself, that is a bullish sign. Both NDX and RUT tested lower prices today before posting small gains. The prevailing wisdom is that the markets are waiting on a deal on Greek debt before running higher. I'm not convinced, but I'm not on CNBC. I think Greece has run out of negotiating time, so hopefully, that news item is about to be put to bed. The question is whether that will propel our markets on to new highs? Technically, we are at new highs now. Could we sell the news?
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Rumors (or futile hopes) of a deal on Greece's debt drove the market higher at the open today. The markets calmed a bit as the day progressed, but most of the gains held into the close. SPX tacked on $13 to close at $2123. RUT jumped up $8 to close at $1292. Volatility pulled back with the VIX losing one point to close at 12.8%. 1.8 billion shares of the S&P 500 companies traded today, well below the 50 dma at 2.02 billion shares. Percentage losses in excess of 50% on the NYSE and NASDAQ didn't mean much since trading volume was so high on expiration Friday.
The only economic data today was existing home sales for May, running at an annualized rate of 5.35 million, up from 5.09 million. New home sales and durable goods orders come out tomorrow with the final estimate of first quarter GDP on Wednesday.
The bulls seem to be gaining the upper hand after taking a few days to think about the FOMC announcement last week. As long as interest rates remain at near zero, it is hard to see a bearish case for stocks. The soap opera in Greece is causing the market some jitters, but we have had several years to adjust for the possibility of Greece defaulting and leaving the EU. It is hard to imagine those events having much of an effect, unless you bought Greek bonds!
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Trading involves a great deal of uncertainty. This is the reason many investment advisers and brokers appear so confident and give you the impression that they understand what just happened in the markets and the underlying reasons for the move. We are looking for that confidence. The markets traded upward today. Why? The Greece problem remains unsolved. The FOMC announcement is still ahead of us. I remained unconvinced that the Greece problem is our problem and whatever interest rate increases are likely to come out of the Fed are probably already priced into the market. But who really knows? All we can do is control our risk in whatever position we take.
SPX closed at $2096, up $12. RUT gained $8 to close at $1270. Trading volume fell off with 1.6 billion shares of the S&P 500 trading. Volume declined 4% on the NYSE and decreased 5% on NASDAQ.
Housing starts dropped a bit in May with 1.036 million, down from 1.165 million. However, building permits were up, increasing from 1.140 million in April to 1.275 million in May. The real estate market remains pretty solid. It is somewhat ironic that real estate lending is where the financial crisis began, and the real estate market has largely recovered, and yet the broad economy remains in the doldrums. Many of the people who lost their jobs in 2008 remain unemployed.
Markets will probably be volatile immediately after the FOMC announcement tomorrow. Don't jump too quickly. The move in the first couple of minutes is often quickly reversed.
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The FOMC announcement and Yellen's news conference contained two messages: 1) The economy is improving, but 2) the improvements are so small, we must leave interest rates effectively at zero. The markets appear to be satisfied with this message, having traded up after the announcement, although it is far from a strong bullish reaction. SPX gained $4 to close at $2100, while RUT declined slightly (one dollar) to $1268. The VIX contracted by about a third of a point to 14.5%.
Based on the FOMC members' forecasts for 2015, it appears they either still hope to increase interest rates this year, or have failed to adjust their forecasts lower. Fourteen FOMC members have forecasts of 0.63% for the Fed discount rate at the end of 2015. Those forecasts would probably require at least two interest rate hikes before the end of the year. But the Fed has also lowered its estimate of 2015 GDP growth to 1.9% and continues to use very modest language to describe employment growth.
Trading volume picked up a bit today with 1.8 billion shares of the S&P 500 stocks trading, but this remains below the 50 dma at 2.0 billion. Trading volume rose 10% on the NYSE, but only increased 3% on NASDAQ.
So where does this leave the market? Historical market trends are largely on the side of sideways to weaker trading during the summer months. This Fed announcement assures traders that the Fed is unlikely to move soon or very quickly thereafter to increase interest rates. The market largely sees that as free money. The sideways trading of the past couple of months appears likely to continue. The bulls' strength is evidenced in how quickly each decline is being bought. But you also see the highs being pulled back in short order. Neither side can make a strong case, so, for now, we are range-bound.
My July iron condors on RUT stand at a net gain of $168 per contract or +21%. The August position is up 9%. While today's reaction to the Fed announcement was muted, that may not be the case tomorrow and Friday. Stay alert.
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The Empire manufacturing survey reported -2.0 for June, down from +3.1 in May. Industrial production decreased 0.2% in May, slightly better than the -0.5% in April. Capacity utilization remains basically flat with a 78.1% report in May, only slightly different from April's 78.3%. Housing starts and building permits report tomorrow and the FOMC announcement is scheduled for Wednesday afternoon. Thursday brings the CPI and the Philadelphia Fed manufacturing survey.
I doubt we will see much happen in the markets until after the Fed announcement.
