The FOMC meeting that took place Tuesday and today was the first one led by new Federal Reserve chairwoman Janet Yellen. Most analysts were expecting the Fed to continue its tapering of bond buying (QE) and to maintain the near zero interest rate policy that has been helping to keep equity markets buoyant despite the taper. (Many traders and investors may recall how until recently the mere mention of QE tapering was enough to send the stock market into a short-term dive. The main reason that equity markets have been dealing so well with the final arrival of a taper at the start of this year has been the Fed's pledge to keep interest rates low.) Markets were stable early in the day and were not fazed much by the text of the FOMC meeting released at 2:00 in the afternoon as it mostly delivered what they were expecting: a continued reduction in bond purchasing and the keeping of interest rates low for an indefinite length of time. The Fed also shifted and redefined their criteria for the hiking of interest rates and gave themselves more flexibility in determining when this should be done in the future. That future seemed to be some distance away as the final paragraphs of the FOMC meeting text stated:
"...even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. "
But then Janet Yellen spoke at a press conference after the meeting and suggested that the Fed could raise interest rates around six months after the bond-buying program ends (which could mean a rate hike in early 2015). The market clearly did not like this comment and the DOW immediately plunged and closed the day with a 114 point loss. Several analysts have pointed out that many investors may have misinterpreted her statement to mean six months from now and reacted with nervous selling. We will have to wait and see over the next two days how strong an impact Yellen's statements will have on the markets.
From a technical analysis standpoint, the DOW is now back below the 16,300 area of resistance that I mentioned in my last blog. If the market remains spooked, that resistance may hold and we could see a further downside in equities, perhaps to the 15,800 area in the DOW. Another bearish factor weighing on the broad stock market now is the increasing tension between Russia and the West over Russia's bold takeover of Crimea. Equity markets generally do not like major geopolitical instability, and there is a great deal of uncertainty right now as to how the West will react if Putin continues to step over the "lines drawn in the sand" by the U.S. and other countries. Directional momentum is still somewhat ambiguous in the major market indices (DOW, S&P 500, NASDAQ) so I am remaining on the sidelines for now.
My suspicion of further downside in the precious metals was confirmed today as both gold and silver prices dropped significantly (especially gold). Ms.Yellen's comments today conveyed (perhaps inadvertently) a somewhat hawkish fiscal tone that seemed to give a boost to the U.S. Dollar but was detrimental to the precious metals. This reaction, of course, may just be short-term and could now bring the price of gold and silver into ideal buying territory. Both of these metals could find a bottom tomorrow or Friday so we need to be alert now for any trading signals to go long. Still on the sidelines and waiting to buy.
I am still standing aside the crude oil market as the directional trend is a little unclear at the moment and the increasing geopolitical tension from the Ukraine crisis could make this market volatile and unpredictable. I am starting to think that the recent correction in this market may not be over and prices could fall lower within the next two weeks, possibly to the $94 - $95 area. If that happens it may be a good spot to buy. Out of this market for now.