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S&P 500 May Pull Back To Retest The Breakout If The Fed Rethinks December Rate Hike Plan

|Includes: SPDR S&P 500 Trust ETF (SPY)

By Ed Wijaranakula, Ph.D., NMS Investment Research

The S&P 500 surged another 1.44% for the short Thanksgiving week, to close on Friday at an all-time high of 2,213.35, led to the upside by Telecommunication services and Materials. The Telecom sector continues to outperform, as the market believes that a new Republican FCC will make a big push to rollback some of the regulations put in place under President Obama. The market is also counting on the new administration's major economic stimulus plans, including $1 trillion in spending on infrastructure, which would create faster economic growth and demand for chemicals and construction materials.

S&P 500 Technicial Chart

The Commerce Department said on Wednesday that non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.4% in October, while the September figure was revised downward to a 1.4% decline from a 1.3% drop previously reported. The orders rebounded in the third-quarter 2016 to a compounded annual growth rate of 5%, after three straight quarters of decline.

The minutes from the FOMC meeting on November 2, released Wednesday, revealed that the staff forecast for the second-half 2016 was lower than in the September projection, primarily reflecting softer-than-expected data for consumer spending. In September, the Fed forecasted U.S. GDP 2016 to be in the range between 1.7 and 1.9%, instead of 1.9 and 2.0% previously forecasted in June.

The Fed also realized that the real GDP growth in the third-quarter had been boosted in part by transitory factors, including a surge in agricultural exports and a bounceback in inventory investment. Excluding these factors, underlying economic growth had been relatively modest, as growth of consumer spending had slowed down, residential investment had fallen again, and business fixed investment had remained soft.

Wall Street wants to see the Federal Reserve raise the federal funds rate target to 50 and 75 basis points at the December 13-14 FOMC meeting, since the probability of a 25 basis point rate hike has already surged over 90%, based on the CME Group 30-day Fed Fund futures prices as of November 25. Failure to do so is no longer an option for the Federal Reserve because the markets have already priced it in.

For the week, the DXY index rose 0.27% to close on Friday at 101.55, a thirteen-year high. The yield of 10-year U.S. Treasury Notes inched up 0.86% this week to close at 2.36% on Friday, while the yield spread between the 10-year and 2-year U.S. Treasury Notes narrowed to 1.24 percentage points. The resistance levels for the 10-year U.S. Treasury yield are 2.36% and 2.50%, respectively. The 10-year JGB yield declined 7.5% to 0.037% at the close on Friday, while the 10-year German bund yield dropped another 11.4%, to close at 0.241%.

The WTI crude price lost 0.65% this week, to close at $46.06 per barrel on Friday, while the Brent crude spot price gained 0.77% to close at $47.24 per barrel, despite a bullish EIA weekly U.S. oil inventory report and Russia reiterating its readiness to freeze oil production at its current levels. OPEC oil ministers will meet on November 28 in Vienna to discuss the contribution that producers outside OPEC will make to a proposed supply-limiting agreement. OPEC agreed in September at a meeting in Algeria to reduce its production to between 32.5 million and 33 million barrels per day (bpd) and had proposed that non-OPEC countries cut oil production by 500,000 bpd.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies fell by 1.3 million barrels to 489.0 million barrels, excluding the Strategic Petroleum Reserve, in the week ending November 18, compared to S&P Global Platts analysts' expectations for no change. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory decrease of 1.3 million barrels.

Separately, the EIA said the weekly U.S. crude oil production dropped 9,000 bpd for the week ending November 18, to 8.69 million bpd. Weekly U.S. crude oil output has fallen about 9.57% from the peak level of 9.61 million bpd during the week ending June 5, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose by another 3 to 474, compared to 316, when the rig count hit the low on June 6, 2016.

The best performing S&P 500 sectors for the week were Telecommunication services and Materials, up 4.62% and 2.69%, respectively. The worst performing sectors for the week were Healthcare and Information technology down 0.32% and up 1.04%, respectively. Eli Lilly (NYSE: LLY) tumbled 10.51% and took the Healthcare sector along with it after the company said that its solanezumab, an experimental Alzheimer's drug, failed a long-anticipated, high-stakes Phase 3 trial known as "Expedition 3."

S&P 500 Summary: +8.29% YTD as of 11/25/16
Barclay Hedge Fund Index: +4.06% YTD

Outperforming Sectors: Energy +18.79% YTD, Industrials +16.55% YTD, Financials +15.59% YTD, Materials +13.47% YTD, Information technology +11.52% YTD, and Telecommunication services +10.80% YTD.

Underperforming Sectors: Utilities +8.25% YTD, Consumer discretionary +6.04% YTD, Consumer staples +1.17% YTD, Healthcare -3.82% YTD, and Real Estate -10.17% YTD.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.