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Hear That? Stock Bulls Cheering Fed Doves

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January 8, 2015

The U.S. stock market broke a five-day slide with index gains north of 1% across the board Wednesday and indications point to back-to-back gains. Driving the action? Fedspeak packed some bullish punch on top of a fairly dovish tone in December Federal Reserve meeting minutes out earlier in the day. Crude stabilized and so did that plunging 10-year Treasury yield, pulling up near 2%. Now of course there’s no cruising into the weekend with Friday morning’s often market-moving monthly payrolls report set to hit. As such, I would not be surprised if the CBOE Volatility Index (VIX) holds up even if the S&P 500 (SPX) gains. It’s likely some traders will be in the buying mood for short-term protection heading into such a big report. Talk of support had dominated technical trading to start the year, but with the bounce chatter turns to the next upside target for the SPX—strong resistance sits at 2050.

FIGURE 1: The CBOE Volatility Index (VIX) charted on the TD Ameritrade thinkorswim® platform slipped below the closely watched 20 reading but could hold an upside bias ahead of payrolls data. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

From the Fed’s Lips…  In Wednesday’s release of Federal Reserve December meeting minutes, officials made clear they don't think current low inflation will be an obstacle for raising short-term interest rates, in part because they believe energy’s drag on inflation will be transitory. Fed officials said they "would want to be reasonably confident that inflation will move back toward 2% over time." As for the big picture, they think any upside risks to the U.S. economy’s growth are "nearly balanced" by the gloomy international outlook. Now, the drama came later in the day. Chicago Fed Prez Charles Evans said in an evening speech that he believes the Fed might not hit that 2% inflation target until 2018. As such, he thinks a rate hike could be on ice until 2016. That’s a little different timeline than the probable 2015 rate-hike that many market participants are anticipating. Of course he’s just one man with one view.

Europe’s Ready to Chip In. So, the Fed wasn’t the only show. Confidence that the European Central Bank is poised to do what it can (aka quantitative easing) to grease the springs helped rally its stock markets and U.S. counterparts. In Europe, weaker economic data is drawing gentle cheers because it’s seen giving officials license to move to shore up the economy. So while it’s sometimes hard to justify strong stock fundamentals amid economic uncertainty, central bank policy is so far playing into the stock bulls’ hands.

Coming Next Week: A relatively light economic calendar but one with a newly powerful acronym—JOLTS. That stands for the Job Openings and Labor Turnover Survey from the Labor Department. It’s been around for a while but was given little attention until a few months ago when the Fed (Janet Yellen in particular) said they take a close look at JOLTS for a more detailed read on the churning and growth in the job market.  Next week brings the unofficial kickoff to the next earnings round, with industrial bellwether Alcoa (AA) running with the torch. AA had an amazing year but the aluminum giant is down 5% since its last earnings report a quarter ago. Will its results next week set the tone for the season?

Good trading,
JJ
@TDAJJKinahan

NC
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