Daily State Of The Markets: The Fed, Rates, Greece (Yes, Again) And Seasonality

Includes: DIA, IWM, QQQ, SPY
by: David Moenning

Coming into the new week it appears that there are four things traders will be paying attention to: The Fed, interest rates, Greece (yes, again), and seasonality. While it will likely be a coin flip to determine which of these issues is at the forefront of the computers' "minds" on any given day, all four could easily come into play this week.

First and foremost, it is "Fed Week" as Janet Yellen's merry band of central bankers from around the country gather once again in Washington D.C. to discuss the economy, monetary policy, and the placement of their all-important "dots."

Frankly, no one expects Yellen & Co. to do anything or even make any major announcements at the conclusion of the meeting on Wednesday. While it is true that the FOMC has made it clear that the "rate liftoff" could begin at any time now, the bottom line is the economic data doesn't appear to have been strong enough lately for Yellen's crew to take action.

Yes, the labor market continues to improve. But the rest of the economic numbers have been surprisingly soft. So, while the time for the Fed to begin hiking rates may be fast approaching, the FOMC's insistence on being "data dependent" would seem to suggest that there will be no "liftoff" this week.

As for the question of when Yellen will hit the go button, most economists seem to think that September is now the most likely target. Well, for now at least.

As such, it appears that traders decided to position the S&P 500 index near the middle of what is turning out to be an extended consolidation pattern. The bottom line from a chart standpoint seems to be that if prices break below 2070 (which is where the 150-day ma, the intermediate-term trendline, and recent support levels all reside), then the bears could seize the day. And then if the S&P were to move back above 2120, the bulls might (key word) be in position to make another run at new highs.

S&P 500 - Daily

Although most folks will agree that the Fed isn't likely to take action on Wednesday, bond traders appear to be getting ahead of what will inevitably be the Fed's next move. As the chart below clearly illustrates, rates have been spiking higher of late. This, of course, begs the question of whether or not the bond market is too far in front of the FOMC or if traders are simply all moving in the same direction at the same time here.

Remember, market "events" tend to occur because too many fast-money masters of the universe wind up on the wrong side of a trade - and then all try to make adjustments simultaneously. Remember, THIS is what causes "dislocations" in the market. And remember, THIS is what can cause things to get ugly in a big hurry.

10-Year T-Note Yield - Weekly

Recall that liquidity in the bond market - or more appropriately, a lack thereof - has been a major theme of late. And given that "Super Mario" has publicly stated that his gang of European Central Bankers has no intention whatsoever to "step in" should volatility in the bond market get jiggy, one could certainly argue that there are traders looking to exit their bond trades sooner rather than later. This, in and of itself, could be contributing to the spike in rates and remains something to watch closely.

Greece - Seriously?

And then there is Greece. To be sure, most investors are probably sick to death of Greece's ongoing debt drama. However, as the daily price action on the S&P 500 made clear last week, the questions of whether or not Greece is going to (a) default on their debt and/or (b) remain in the eurozone, still seem to carry some weight. Recall that stocks surged off their recent lows last Wednesday on word that Germany was on board with the new deal, only to pullback on Friday when a deal remained elusive. And so it goes.

Insert long sigh here.

And Then There is Seasonality

According to Asbury Research, stock market seasonality is about to go into the tank.

Source: Asbury Research

The above chart shows that the 3rd week of June, which is this week, is statistically the seasonally weakest week of the entire 2nd Quarter in the S&P 500 based on data since 1957. And unfortunately, this week is followed by the 3rd seasonally weakest week of the quarter. Super.

Asbury points out that on average since 1957, the 3rd week of June has posted a negative weekly close 53% of the time, which is the highest incidence of a negative close for any week of the 2nd Quarter during this period.

So, with the Fed on tap, rates threatening to be a problem, the ongoing drama in Greece, and the weak seasonality, it appears that investors could be in for a rocky ride this week. However, until the S&P can make a break above 2135 or below 2070, it is a safe bet that we will be in for more of the same back-and-forth, up-and-down mess that has prevailed this year.

This Morning's Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

Japan: -0.09%

Hong Kong: -1.53%

Shanghai: -2.00%

London: -0.99%

Germany: -1.84%

France: -1.60%

Italy: -2.38%

Spain: -1.98%

Crude Oil Futures: -$0.81 to $59.15

Gold: -$0.50 at $1178.50

Dollar: lower against the yen, higher vs. euro and pound

10-Year Bond Yield: Currently trading at 2.341%

Stock Indices in U.S. (relative to fair value):

S&P 500: -11.51

Dow Jones Industrial Average: -95

NASDAQ Composite: -24.24

Thought For The Day:

"The less you know, the more you believe." -Bono

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of Interest Rates

2. The State of Fed/ECB/PBoC Policy

3. The State of the U.S. Economy

4. The State of the U.S. Dollar

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Neutral

(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Positive

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive

(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 2070
  • Key Near-Term Resistance Zone(s): 2120-2135

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Positive
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Neutral
  • Intermediate-Term Bull/Bear Volume Relationship: Moderately Positive
  • Technical Health of 100+ Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • S&P 500 Overbought/Oversold Conditions:

    - Short-Term: Neutral

    - Intermediate-Term: Moderately Oversold

  • Market Sentiment: Our primary sentiment model is Neutral .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

  • Weekly Market Environment Model Reading: Neutral