I’ve at all times appreciated to have a look at sure factors throughout a bull market or bear market the place the character of the market might change primarily based on key elementary information. We have been at a type of factors on Wednesday as 2 o’clock approached. The Fed was about to ship their newest coverage assertion and merchants have been on pins and needles. Questions have been swirling about what the Fed may say, and do, given the February Core CPI and Core PPI numbers that have been reported increased than anticipated. The Fed already has squashed the bulls as soon as lately, once they shot down the potential for a March 2024 fee lower after expectations have been constructing for precisely that. There have been nonetheless the three fee cuts alleged to happen in 2024, however the Fed informed us that increased charges would stay a bit longer.

Most merchants aren’t blessed with nice endurance. Issues might have turned ugly this previous Wednesday at 2pm ET if the Fed determined to attend even longer to decrease charges, probably slicing the anticipated variety of fee cuts from 3 right down to some decrease quantity. And what may occur if the Fed did an “about face” and stated one thing that may point out they’d must rethink climbing once more? In spite of everything, this Fed hasn’t precisely been constant in its dialogue about rates of interest.

Nicely, lots of that anxiousness got here to an finish on Wednesday because the Fed caught to its earlier steerage, regardless of the upper inflation reviews the week prior. The inventory market NEVER performs nicely when uncertainty is rising, nevertheless it typically does fairly nicely when that anxiousness is diminished. So in the mean time the Fed indicated that nothing had actually modified of their view, the inventory market screamed increased, with the small cap IWM shortly testing overhead value resistance:

This was the chart I despatched to EB members in my Day by day Market Report on Thursday. Small caps obtained the information it was searching for and reacted in accordance – to the upside. However the closing breakout by no means occurred on Thursday and that false breakout led to some revenue taking up Friday. It’s going to be attention-grabbing to see the place small caps head this week. Since 1987, the annualized return for the IWM over the subsequent 7 days is 41.20%, greater than 4 instances its common annual return. This tells us that historical past suggests a powerful week forward for small caps. However nothing is extra essential than the mix of value and quantity. Earlier than we develop overly enthusiastic about IWM’s prospects, we have to clear candle physique value resistance, presently at 208.21.

Main Index and Sector Rotation

With this new data (mainly the identical because the previous), and with inflation fears subsiding additional, the place did the cash go from Wednesday 2pm ET by Friday’s shut? Should not we be excited by what the massive Wall Road companies have been doing with their cash after this elementary announcement? Nicely, that is what the massive boys have been favoring after the announcement.

Main Indices

• NASDAQ 100 (QQQ): +1.74%
• Russell 2000 (IWM): +1.73%
• S&P 400 Mid Cap (MDY): +1.55%
• S&P 500 Massive Cap (SPY): +1.11%
• Dow Jones (DIA): +0.92%

Sectors

• Industrials (XLI): +1.49%
• Communication Companies (XLC): +1.46%
• Know-how (XLK): +1.34%
• Client Discretionary (XLY): +0.84%
• Vitality (XLE): +0.74%
• Financials (XLF): +0.73%
• Well being Care (XLV): +0.48%
• Supplies (XLB): +0.42%
• Actual Property (XLRE): +0.16%
• Utilities (XLU): +0.05%
• Client Staples: -0.08%

Clearly, cash rotated and benefited “danger on” areas of the inventory market, which is secular bull market habits. Aggressive sectors led by a large margin over defensive sectors. Cash additionally returned to development as most development vs. worth ratios turned increased after Wednesday 2pm ET as nicely.

Trade Group Rotation

We now know that cash rotated in bullish style and to extra growth-oriented areas, although industrials’ management and the S&P 500’s break to one more all-time excessive after the Fed announcement is additional proof of broad participation on this newest advance. And with small caps proper up there with the NASDAQ 100, all these breadth arguments could be tossed proper out of the window.

This is what we should always take away from trade group efficiency after the Fed assembly:

1. Semiconductors ($DJUSSC) was #1 amongst ALL trade teams – not too stunning
2. The Prime 10 trade group performers belonged to both know-how (XLK), client discretionary (XLY), or industrials (XLI)
3. Heavy development ($DJUSHV) had damaged out just a few weeks in the past and the Fed announcement noticed momentum improve considerably inside this group
4. Trucking ($DJUSTK) bounced off 50-day SMA help and is poised to interrupt additional into all-time excessive territory, a really bullish improvement for transportation shares ($TRAN) normally
5. Gold mining ($DJUSPM) and mining ($DJUSMG) each noticed bullish preliminary reactions, however then gave again most of these positive factors by Friday

Massive Loser

In my thoughts, it is as soon as once more gold ($GOLD). I believe many merchants believed that falling charges forward would set off a drop within the U.S. Greenback (UUP). Not gonna occur. Any weak spot within the greenback of late has been triggered by potential erosion by inflation. The Fed basically stated that inflation is not an issue, regardless of the upper CPI and PPI readings lately. Our financial system stays fairly resilient and unemployment stays low, particularly in comparison with international economies. That is why the UUP is robust. One other breakout within the UUP might be at hand:

I do know many preserve pointing to the current breakout in GLD, however I need to OUTPERFORM the S&P 500 and the above chart exhibits you that, outdoors of some short-term pops to the upside (blue-dotted directional strains), the general RELATIVE efficiency line goes down, down, down in a really huge method. No thanks.

A Quickly-Bettering Heavy Development Small Cap Inventory

I used to be specializing in the heavy development space ($DJUSHV) this weekend, due to its current energy after which the surge after final Wednesday’s Fed assembly and coverage assertion. There are a selection of shares that caught my consideration, however one particularly that I consider has a LOT extra upside given its present technical outlook. I will be sending it out to our FREE EB Digest subscriber neighborhood earlier than the market opens tomorrow morning. In case you’re not already a subscriber, you’ll be able to CLICK HERE to enroll along with your identify and e mail tackle. There isn’t a bank card required and it’s possible you’ll unsubscribe at any time!

Completely satisfied buying and selling!

Tom