Stock Indexes Get Help From Fed, But Rally Tires
The Federal Reserve gave the markets exactly what they were looking for last week—a 50 basis-point cut in interest rates at the conclusion of their regular policy meeting on Wednesday, January 30. It looks like the bottom may be in for stocks, but on the other hand, one has to wonder whether the Fed's aggressive slashing of short-term rates twice in one month means the economy is in even worse shape than we thought.
The market was a bit volatile last week, but major market averages ended on an upbeat note. The S&P 500 climbed 4.9 percent, the Dow Jones Industrial Average rallied 4.4 percent and the Nasdaq was up 3.7 percent. In addition to help from the Fed, which slashed its key short-term lending rate (the Fed funds rate) to 3 percent, corporate news also lifted spirits by week's end as Microsoft Corp. bid $44.6 billion for Yahoo! Inc. The market even managed to overcome a weak January employment report, which capped off the week on Friday, February 1.
From a technical standpoint, the March S&P 500 futures contract closed above the 20-day moving average at 1375 Friday, suggesting a low has been posted-at least for now. Momentum indicators, the stochastics and relative strength index (RSI), remain bullish and suggest sideways to higher price action. However, short-term traders should look for small pullbacks today, as the market could be a little overbought after last week's rally. I recommend selling under 1408, with support down to 1331 if this early weakness accelerates. Trade above 1414 would be a buy. If March S&P can resume last week's rally, resistance should come in at 1425.
The economic calendar this week is rather light. Tuesday's data includes the Institute of Supply Management's Services Index, preliminary fourth-quarter productivity is due out Wednesday and Thursday offers initial jobless claims data. Also on Thursday, watch for action in Europe as their central bankers meet and could make rate changes. Market participants are anticipating the Bank of England will cut interest rates by 25 basis points at its meeting, but the European Central Bank is expected to hold rates steady.
Jeffrey Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com.
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