This means that investors aren’t likely to take the markets much higher until they see the Fed’s rate projections following next week’s meeting. In other words, the next leg up in the stock market hinges upon whether the Fed hints at 2 or 3 rate cuts later this year.
The major U.S. stock indexes retreated for a second session on Wednesday with the brunt of the pressure coming from weakness in the energy sector following another plunge in crude oil prices. The technology sector was a close second with the selling driven by a weak performance in chip stocks.
Crude oil prices plunged 4% on Wednesday after a government report showed a large increase in U.S. crude stockpiles. According to the Energy Information Administration (EIA), U.S. commercial crude inventories rose by 2.2 million barrels in the week through June 7. Traders were looking for a draw of 481,000.
Semiconductor stocks were pressured after an Evercore ISI analyst said a recovery in the space will likely be pushed back to the second half of 2020. The news also drove Lam Research 5.3% lower, followed by losses in Applied Material, KLA-Tencor and Teradyne. The one-sided weakness led to a 2.2% drop in the VanEck Vectors Semiconductors ETF (SMH).
The price action in the sectors suggests traders are not standing in the way of headline driven price action like in the Energy sector. Instead, they are taking protection in a few of the other underperforming sectors. Furthermore, expectations of lower interest rates are helping to make the Utilities sector an attractive investment. At the same time, the Financials are being pressured by underperforming bank stocks, which are falling due to the plunge in Treasury yields.
Last week, stocks took off after Federal Reserve Chairman opened the door to a rate cut later this year. Traders are now pricing in an 85% chance of a cut in July. However, investors showed a limited response to the muted consumer inflation data released early Wednesday. Although the weak inflation numbers likely solidified the rate cut, the price action suggests the interest rate cut premium put into the market during the week-long rally is probably over. This means that investors aren’t likely to take the markets much higher until they see the Fed’s rate projections following next week’s meeting. In other words, the next leg up in the stock market hinges upon whether the Fed hints at 2 or 3 rate cuts later this year.
James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.