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Market Update

Fed Persistence Sobering for Stock Investors

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January 29, 2015

The Dow Jones Industrial Average (DJIA) stubbornly stuck to flat ranges until a more-hawkish Federal Reserve slapped around the blue-chip index in late trading Wednesday; the Dow clawed back to positive in early action today. A feather in the cap of the bulls, however, was the S&P 500’s (SPX) ability to hold 2000 (although the futures did dip below the 2000 equivalency in after-hours trading). As for a measure of market “worry,” the CBOE Volatility Index (VIX) shot up nearly 19% but at the end of the day was held in check near the pivotal “20” line. Oil pushed to new multi-year lows and even broader market participants are zeroing in on euro/dollar 1.13. A drop much below this value and a fresh round of worry for U.S. exports could circulate.

Was Fed day a challenging day for bulls? Yes. A crushing day? No. And that simply sets up interesting trading as the market gets back to the business of earnings reports that span the likes of industrial conglomerates, carmakers, and Chinese e-commerce giants. The earnings line-up is not letting up any time soon. After the close come two heavy-hitters: Amazon.com (AMZN) and Google (GOOGL, GOOG).

FIGURE 1: The S&P 500 (SPX) held 2000 Wednesday in a volatile session capped by the Federal Reserve’s repeat of rate-hike plans. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Mid-Year Hikes on the Table. The Federal Reserve gave no sign Wednesday that it’s stepping down from plans to hike interest rates later this year. Most Street economists think that first move could come at the Fed’s June meeting (a few experts believe the Fed has the low-inflation cover to wait until 2016). The Fed noted global economic and oil volatility, and a few stinkers among the latest economic reports (now, a drop in jobless claims to their lowest since April 2000 in a report early this morning is making the Fed look pretty smart). Still, the policy statement had few changes from December, and the few tweaks were tilted mainly hawkish. Policymakers remained optimistic about inflation, repeating that their favorite measure of prices will move back gradually to the 2% annual target rate after being pushed down by “transitory” factors. As widely expected, the statement repeated that the central bank can be “patient” in hiking rates.

Facebook’s Turn. Facebook (FB) reported stronger-than-expected Q4 earnings and sales in a report late Wednesday, as mobile usage and ad revenues increased. A key segment of its business, mobile advertising revenue represented roughly 69% of advertising revenue in Q4, up from just 53% of total ad sales a year ago. But some investors are still scratching their heads. The expenses line of the ledger was high. Granted, the company said it went largely to R&D, a sometimes “forgiven” expense. But, it is likely that investors will increasingly demand to see new products come to market if expenses are going to run high.  

Old Economy/New Economy. Here’s one conglomerate whose quarter appeared to buck currency pressures: Dow Chemical (DOW) is an early gainer after this morning reporting stronger-than-expected Q4 earnings. It said higher volumes across sectors offset price declines in Western Europe linked to a strong buck. Also trending this morning, Alibaba (BABA), one of 2014’s headline-grabbing IPOs, is getting walloped after its 40% year-over-year revenue rise in Q4 was below what the Street expected. BABA shares are on course to enter their first bearish chart since public launch.

Good trading,
JJ
@TDAJJKinahan

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