The three major U.S. stock indices surrender their strongest gains in two months with investors reluctant to push the markets higher ahead of the two-day FOMC meeting on September 20-21. The Federal Reserve’s decision has become the subject of intense market speculation in recent days. In our view, there's not enough ammunition for a September rate rise as inflation is holding below the Fed’s 2% target and the unemployment rate has slightly changed in recent months, as it remained 4.9% for the third straight month. The pace of hiring in the U.S. slowed sharply in August after huge gains earlier in the summer. The U.S. Labor Department said hiring rose by 151,000 jobs last month, sharply down from an upwardly revised 275,000 increase in July and a 271,000 gain in June. Moreover, the U.S. manufacturing plunged in August to a level indicating activity has shrunk, another sign of the difficulties in the factory sector. The Institute for Supply Management stated on Thursday that its manufacturing index in August fell to 49.4% from 52.6% last month, below the expectation for a 52% reading. Any reading below 50% indicates contraction, and the index was below that level for the first time since February.
In her last speech, Fed’s Brainard maintained a dovish tone on the general U.S. economic performance. The FOMC voter casted doubt on a rate hike in September and said that the central bank should avoid removing support for the economy too quickly. She added that the U.S. economy looks vulnerable to external economic weakness and the best scenario is to have a stronger increase in U.S. consumer spending and evidence that inflation rate is picking up before Fed raises rates. In addition, the Atlanta Fed chairman, Dennis Lockhart said that the U.S. economy is barely growing but is expected to keep advancing fast enough to prompt FOMC to think seriously of monetary tightening next week. It should be mentioned that after the weak August economic releases and comments from policymakers, market participants doubt a rate hike in September. It should be noted that Monday was the last day the FOMC members were allowed to speak before the “black-out period” begins. The policymakers are not allowed to give public speeches the week before the FOMC meeting.
Markets have been choppy this week following the slow job growth in August and ahead of a possible interest rate hike by the Fed on September 21. The Standard & Poor's 500 closed down more than 2% on Friday, the first time in 43 trading days that the U.S. index closed with a gain or loss of more than 1%. For the month, the index is down 5.5% while managing to maintain its year-to-date YTD gains of 5.60%. The S&P500 index surged more than 10% the last year while adding to its value more than 25% over the last 3 years.
The Dow Jones Industrial Average closed the previous week down 2.2%, with all 30 blue-chip companies finishing Friday’s session in red. The index fell nearly 400 points on Friday, the worst day of the year if we exclude the Brexit day when the index fell just over 600 pips. Following six consecutive positive months where the index added more than 10%, the DJIA plunged 0.17% the previous month and is 0.41% down so far this month. It should be noted that the index is up 5.20% YTD and up 12% over the last year. The index gained more than 15% over the last 3 years.
The tech-heavy Nasdaq Composite Index technology index closed the previous month in gains, near 1%, however, following the sharp sell-off the last few days it could place under threat its long-term uptrend. The tech index traded positive for the YTD +4.08 and 8.50% over the last year.
Average returns are the simple mathematical average of a series of returns generated over a period of time. The Nasdaq composite index returned 31% in 2009 and 28% in 2013 to investors while it gained more than 10% in 2010, 2012 and in 2014. In 2015, the Nasdaq composite index delivered 5% gains while it is up 4% so far this year, threating to snap five straight years of gains. On the other hand, the average return rate for the S&P 500 from 2009 to 2012 was near 40%, contrary with the Nasdaq composite which returned near 60% to investors. Of the returns for the years between 2009 and 2016, 2015 had the lowest with -1%; 2013 had the highest with 23%. While both of the U.S. indices (S&P500 and Nasdaq) were performing well over the last 5 years, the dollar index, despite the negative performance from 2009 to 2013, gained 8% in 2014 and 5% in 2015, the year that the S&P500 snapped a negative month and the Nasdaq index recorded a figure below 10% for the first time after the -2% drop in 2011. Therefore, the annual return in the dollar index is becoming more stable over the last few years.
Dow Jones Industrial Average – Technical Outlook
The Dow Jones Industrial Average index edged sharply upwards during the last seven months and surged more than 10%. The index is moving in an uptrend since January 2016 and is still holding. Over August the price climbed to the 18668 resistance level which is an all-time high following the pullback from the 15459 support level.
From a technical point of view, looking at the weekly timeframe, last week the index had an aggressive sell-off and plummeted more than 2%. In previous weeks, the price was consolidating and trading within a trading range, moving down to support at 18291 and up to the fresh highs at 18668. Currently, the index is moving near the 18200 price level and on Monday rebounded on the 200-daily SMA and gave back almost all of its Friday gains as it found resistance at the 50-daily SMA. In addition, a further upside potential move will take place if there is a break above the significant resistance zone at 18240 – 18291 where the price will challenge the 18553 barrier. An alternative scenario will be if there is a penetration of the ascending trend line which will open the door 17708 support barrier. The momentum indicators have turned slightly lower while the RSI indicator is sloping downwards after it bounced off the 30 level.
S&P500 – Technical Outlook
The S&P 500 index advanced to an all-time high in August and reached the 2193 price level. From March to July, the index following the rebound on 1807, which is near the 200-SMA on the 4-hour chart, surged more than 12%. The index is ascending since last February and during this week tried to retest it.
The technical structure remains bullish to neutral, with the pair meeting some short-term selling interest around the key resistance zone at 2148 – 2154. The price failed to surpass the latter zone and is moving towards the 100-daily SMA. A successful break above the aforementioned obstacle will open the way for the new high at 2193 resistance level but the price needs to go through the 50-daily SMA. On the other hand, a downward move is possible if there is a penetration of the 2107 support level which overlaps with the rising trend line. Technical indicators are endorsing the thought for a small downward correction after the strong pullback on Monday. The MACD oscillator lies below both, the zero and trigger lines, while the RSI is near the 50 level and sloping to the downside.
Nasdaq Composite Index – Technical Outlook
The Nasdaq index surged more than 7% the last three months and challenged a new high at 4837 resistance level. Over the last seven months the index has been moving in an uptrend within an ascending channel and now the price is moving below the key resistance area 4771 – 4780. During yesterday’s session, the index rose 1.6% and gave back almost all the gains from Friday’s sell-off. Additionally, the price had a pullback on the 50-daily SMA and is now moving near the 4738 price level. A break above the referred area will open the way for the 4837 barrier. On the other hand, the price may continue its downward move until the 4625 support level which is near the 100-daily SMA. From a technical point of view, the technical indicators on the daily chart are in negative territory. The RSI indicator bounced off the 50 level and is currently moving below it. The MACD oscillator has just entered into the negative territory and is moving below its trigger line.
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