TGIF! This is one of those weeks that traders are happy to see come to a close.
The last four days (from 9:30am on Monday am to 10:30am on Friday) have resulted in a decline of 3.25% for the S&P 500. Notable events this week include the Federal Reserve’s decision on interest rates. It was no surprise they raised rates by 25 basis points (1/4 of one percent). What was confusing was that the Federal Reserve downgraded their assessment of the current economy but signaled a steeper path of rate hikes into 2019 and 2020.
Another head scratcher was the fact that, all other things being equal, when interest rates rise so too does the value of the underlying currency; however, that’s not what happened this week. The Fed raised rates and the value of our dollar weakened.
The drama came full-force yesterday when the president announced $50-$60 billion worth of tariffs on China which resulted in nearly $1 trillion of equity evaporation. Importantly, this decline caused the market to fall through some relatively significant support levels.
In the attached chart you will see four horizontal lines – two blue and two green. The two green lines represent support, meaning these are the prices at which buyers have typically opened their wallets and bought stocks. This buying pressure keeps prices from falling further. The two blue lines (which used to be green when the market was above them) now represent resistance. Think of these levels as a price that the market must recapture in order for investors to feel confident that new highs are back in the crosshairs.
We believe it’s highly probable that we’re going to see sideways market movement in the near term. That’s not uncommon. As you can see on the left side of the included chart, I highlighted a few time frames in the last 12 months in which the market went sideways.
The capital markets have not provided us with clear signals in the last few weeks so we will patiently wait for a break-out (up or down) but believe, until proven otherwise, the secular bull market remains in place. This is due to the fact that the underpinnings of the economy are supportive of economic growth.
We encourage you to remember two things; first, the market can be emotional at times but those periods are often fleeting. Second, the market seldom bottoms on a Friday. Investors tend to stew about their losses over the weekend and show up Monday ready to sell in an effort to stop the bleeding. There seems to be a decent probability of the market retesting the February 9 low; but even after weeks like this one, we still believe it is a good time to own stocks!
Best wishes for a great weekend!