US stocks extend rally, but will the Fed spoil the party for bulls?

<p>Global equity markets have increased their gains at the start of the week, with European indices closing between 0.3 to 1.6 per cent higher today. […]</p>

Global equity markets have increased their gains at the start of the week, with European indices closing between 0.3 to 1.6 per cent higher today. In the US, shares on Wall Street were trading higher at the time of this writing. Sentiment in the stock markets has remained resilient despite a sell-off in the oil market and fresh data showing industrial activity in China slowed down more than expected at the start of the year. Stock market investors seem happy to be picking the dips due to the on-going support from central banks. With interest rates being virtually zero across the developed nations, there are not many asset classes that come with acceptable yields and reasonable degrees of risk.

Indeed, after the initial scepticism over the ECB’s latest stimulus package faded, stocks have rebounded strongly from their Thursday afternoon’s lows. In this regard, it will be interesting to observe how the markets will react to the upcoming policy decisions from the Bank of Japan on Tuesday, the US Federal Reserve on Wednesday and the Bank of England and Swiss National Bank on Thursday. Apart from the SNB, the rest of these central banks are unlikely to make any changes to their policies. But equally important will be the forward guidance from the Fed. If the FOMC hints strongly at the prospects of another rate rise in June then US equities may react negatively. The prospects of marginally higher borrowing costs may discourage investors from buying stocks without a sizeable pullback. In contrast, if the Fed appears to be more dovish than expected then stocks may actually extend their gains. In any event, US markets may soon start to underperform their European peers where the Europe Central Bank has turned even more dovish by the introduction of a beefed-up QE package.

Ahead of the central bank meetings, the technical outlook on US stock indices continues to look constructive, with both the Dow and S&P 500 closing above their respective 200-day moving averages for the first time this year at the end of last week. The Nasdaq 100 however has underperformed somewhat, for it still remains below its own 200 MA. Nevertheless, the underlying price action continues to look constructive for this index too.  Ever since it created a false break reversal pattern at 3905 in February, the index has been putting in higher highs and higher lows. Today, the tech-heavy index is trying to climb above the recent range highs of 3445/75 area. So far, it is doing a good job at it but things could change quickly if, for example, oil extends its decline further.

A close above this 4345/75 area, if seen, would strongly point to a continuation of the rally towards the 61.8% Fibonacci retracement at 4406, the 200-day moving average at 4418 or the previous support/resistance level at 4450/55 area. The RSI is still not at the “overbought” threshold of 70, so there may be some juice left in this rally. At this stage, a closing break below 4345 would be deemed a bearish outcome in the short-term outlook. If seen, the Nasdaq 100 could potentially drop back towards Thursday’s lows of around 4230 before deciding on its next move.

16.03.14 ustec

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.