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S&P 500 Rally Continues As The Market Seems To Be Very Confident That The Fed Funds Rate Will Not Be Raised “Fairly Soon”

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

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

The S&P 500 gained another 0.69% for the week, to close on Friday at 2,367.34, another record closing high and up for the fifth straight week, led by the high dividend paying Utilities and Telecommunication services sectors. The best performing S&P 500 sectors for the week were Utilities ($SPU) and Telecommunication services ($SPTS), up 3.99% and 2.53%, respectively. The worst performing sector for the week was Energy ($SPEN), down another 1.29%, as the WTIC crude price seems not to be going much above $54 per barrel. The market is signaling a risk-off trade and betting that the Fed will not act at the March FOMC meeting.

S&P 500 Technical Chart

S&P 500 Utilities Technical Chart

The S&P 500 is now trading near the top of the range. From the Relative Strength Index, or RSI, the S&P 500 index remains overbought, while the Moving Average Convergence/Divergence, or MACD, line is still making higher highs, meaning the index could continue to move higher.

The U.S. Dollar index (DXY), a measure of the U.S. dollar value relative to a basket of foreign currencies, closed at 101.09 on Friday, up another 0.14% for the week, ahead of President Trump's address to Congress on Tuesday. The Fed minutes from the January FOMC meeting, released on Wednesday, revealed that the Fed committee had concerns about dollar appreciation and the downside risks of expectations for long-term inflation. "Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations", according to the Fed minutes.

The yield of 10-year U.S. Treasury Notes tumbled 4.55% this week, to close on Friday at 2.31%, while the yield spread between the 10-year and 2-year U.S. Treasury Notes narrowed to 1.19 percentage points. The yield of the 10-year Treasury Note has fallen about 11%, from its 52-week high of 2.6%, since the Federal Reserve's second interest rate hike at its December FOMC meeting. There are plenty of concerns out there, including a Federal Reserve interest rate hike at the March FOMC meeting that could end up being just more talk with no action, and Trump's "Phenomenal" Tax Bill which could be pushed back until August.

According to The Hill, President Trump and GOP leaders are reportedly considering punting on a major infrastructure package until 2018, as Congress wrestles with a crammed legislative calendar this year. To make matters worse, Treasury Secretary Steven Mnuchin said Thursday that he has asked his staff to explore having the U.S. government issue debt maturities as long as 50 years or 100 years.

Gold Price Technical Chart

The spot gold price soared 1.55% for the week, to close at $1,258.30 per ounce on Friday, while the Japanese yen was up 0.2% against the U.S. dollar. Investors rushed to safe-havens after a poll showed French far right leader Marine Le Pen would win 27.5% of the vote in the April 23 first round of the France presidential election, up 2.5 percentage points from the last time the poll was conducted on February 4, according to Reuters.

WTI Crude Price Technical Chart

The WTI crude spot price inched up 0.39% for the week, closing at $53.99 per barrel on Friday, while the Brent crude spot price gained 1.08% for the week to close at $56.33 per barrel, despite the bullish EIA weekly report on Thursday. The EIA data could be misleading though, as traders are starting to ship crude out of inventories to refineries, or exports, since the rising price of oil for near-term delivery reduces their profits, according to Reuters. To make money by holding crude, the spread between oil prices for the future months needs to be wide enough to cover the cost of leasing tank space and borrowing money to buy the fuel to fill it.

Speculative long positions in WTI crude oil futures contracts held by money managers totaled 448,846 contracts as of February 21, 2017, another record high, according to data from the U.S. Commodity Futures Trading Commission, or CFTC.

The EIA weekly U.S. oil inventory report on Thursday showed that domestic crude supplies increased by another 564,000 barrels to a record 518.68 million barrels, excluding the Strategic Petroleum Reserve, in the week ending February 17, compared to The Wall Street Journal forecast for a stockpile increase of 3.4 million barrels. The American Petroleum Institute, or API, inventory data on Wednesday showed a U.S. crude inventory decline of 884,000 barrels.

Separately, the EIA said the weekly U.S. crude oil production decreased 24,000 barrels per day, or bpd, for the week ending February 17, to 9.00 million bpd. U.S. crude oil output increased 26,000 bpd to an average of 8.968 million bpd in February, compared to a January average of 8.942 million bpd. Output has fallen about 6.59% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose another 5 to 602, compared to 316, when the rig count hit the low on June 6, 2016.

S&P 500 Summary: +5.74% YTD as of 02/24/17
Barclay Hedge Fund Index: +1.41% YTD

Outperforming Sectors: Information technology +9.94 YTD, Healthcare +8.34% YTD, Consumer staples +6.74% YTD and Consumer discretionary +6.73% YTD.

Underperforming Sectors: Utilities +5.61% YTD, Materials +5.47% YTD, Industrials +5.02% YTD, Financials +4.84% YTD, Real Estate +4.09% YTD, Telecommunication services -2.26% YTD, and Energy -6.85% YTD.

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