WEEK IN REVIEW "Overreaction to The Fed"

THE WEEK IN REVIEW 

Global markets rebounded this week after a tumultuous showing the previous week. Stocks regained ground after a sharply negative reaction last week, when expectations rose for a change in US Federal Reserve monetary policy. After a report was released Tuesday indicating the US economy had grown less in the first quarter than earlier estimated, markets rallied, assuming a likely reprieve from rising rates. Changing expectations on the timing of an end by the Fed to its accommodative policies remains the driving force for global stocks, bonds and commodities.

News from the eurozone was mixed: Consumer and business sentiment improved, but an early indicator of gross domestic product showed that the region's economy likely shrank for a seventh straight quarter. Japan's manufacturing activity expanded in June at its fastest pace in two years and consumer prices were flat, with expectations that inflation could begin in June. For the week, major stock indices rose and bond prices fell, while yields continued to climb overall. Gold futures dropped to a three-year low of less than $1,200 an ounce.

U.S. stocks rose during the second quarter, but ended June with losses as investors started to come to terms with the potential slowdown in the Federal Reserve's monetary stimulus program.

For the second quarter, the Dow Jones Industrial Average rose 2.3%, the S&P 500 gained 2.4% and the Nasdaq Composite climbed 4.2%.

Today, the Dow and the S&P 500 index ended lower, while the Nasdaq Composite eked out a small gain. The S&P 500 ended Friday down 6.92 points, or 0.4%, at 1,606.28, leaving it up 0.9% for the week and down 1.5% in June.  The Dow dropped 114.89 points, or 0.8%, Friday to end at 14,909.60, leaving it up 0.7% for the week and down 1.4% in June.

One clue that we were nearing a short term bounce this week was just how intense the selling pressure was last week.  Major market indices saw intense volatility across the board and "triple digit" swings became the norm.

Another reason is that at this juncture, all the major indexes have come back to their breakout points and have tested. The last to do so was the broad Nasdaq Composite.  Given the way we have tested, there is still likely to be more work to do on the downside, but before that occurs, I would think that we get some sort of bounce because this is still a bull market if you back up a bit and look at the intermediate term  in the S&P 500.

So at this juncture, the question is what will the bounce look like and where might it carry to? Using the S&P 500 again as an example, notice the swing point low from June 6, 2013 that broke on the way down? That is the natural test when price bounces. The fact that it aligns with the swing point high from April 11 creates an anchored resistance zone. That will be the first test on the way up.

Given that we are still in a longer term bull market move, I would defer to the idea of the larger bounce to the higher anchored resistance zone as having a higher probability.

In the end though, this remains a range trade and range trades can be quite profitable as long as you keep deferring to what the market both gives and says. You measure tests on the way up and down; you look for the fulfillment of projections that set up; and you work both sides of the tape with the longer term bias of bullish since that is the trend still.