Sunday, May 22, 2016

Week In Review (5/16 - 5/20)

The S&P 500 pinballed back and forth between positive and negative territory all week and ultimately finished with a small gain.  This brought an end to the market's 3-week losing streak and helped to keep the S&P in positive territory for the year.

While the index finished just 6 points higher than where it closed 7 days earlier, it took a rather bumpy course to get there.  The average intraday swing for the S&P on the week was 1.1% and much of this volatility can be attributed to the anticipation of and reaction to the minutes from the FOMC's April meeting.  A number of Federal Reserve officials seemed to be in agreement that a June rate hike could be warranted.  According to the Minutes:

 "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation marking progress toward the Committee's 2.0% objective, then it would likely be appropriate for the Committee to increase the target range for the federal funds rate in June."

As of last Friday, the futures market was pricing in just an 8% chance of the Fed making a rate move at the June meeting.  That probability had jumped to 30% by the end of this week while the likelihood of a July hike had risen to 55%.

With the last full trading week of the month upon us, the S&P is down 0.63% in May while this week's outperformance by the NASDAQ (+1.1%) helped it climb back toward flat for the month. 

On a year-to-date basis, the NASDAQ and Russell 2000 still lag behind the other domestic indexes by a wide margin.  

It's also worth noting that this week also marked the 1-year anniversary of the S&P making its all-time high of 2,134.  We've observed in this space and elsewhere that even while the index is within spitting distance of the high set last May, investor sentiment readings suggest that we're anything but overly bullish.  Laszlo Birinyi, president of Birinyi Associates, says that this is one of the reasons that an end to this bull market won't be any time soon.

"There are lots of concerns—economic, technical, political, fear that we haven’t topped the all-time high of 2130 from last May, stories about people taking $20 billion out of the market or hedge funds losing billions. But the market is only 5% from the all-time high. To an old trader, this is encouraging. There is an underlying strength. We have a new high in the S&P 500 advance/decline line. Since 2009, so many of the negative concerns have been ill-founded. One of the headlines was “U.S. Stock Rally Narrows, Signaling End.” That was June 2009.
At the end, the market gets narrower, and if you use the historical template, people get excited, money goes into growth funds. That’s not happening. Enthusiasm is tempered, which suggests to me it has a ways to go."

If the past week is any indication, there is going to be a whole lot of Fed watching over the summer months and its actions will play a large role in whatever direction the market takes over the near/intermediate term.

Have a great week.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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