Traders were pleasantly surprised by the Federal Reserve's decision to continue buying $85 billion worth of bonds a month. Stocks, bonds and gold moved up on the news, but the effect was short-lived as stocks and gold sold off into the end of the week.
A Slow Economy Cheers Traders
SPDR S&P 500 (SPY) gained 0.82% last week, but daily changes show there was a great deal of volatility.
After two days of significant gains, stocks moved sharply higher after the Fed's announcement on Wednesday. A small decline like we saw on Thursday is fairly common after three days of larger-than-average gains, but Friday's sell-off was significant.
The Fed's announcement that it would continue buying bonds at the current pace included troubling information about the state of the economy. Growth estimates for the rest of the year were lowered. This was the Fed's fourth consecutive cut in its forecast, and the economy is now expected to grow about half as fast as the Fed initially forecast.
Source: Guggenheim Investments
The first forecast for 2013 GDP growth was released in January 2011, and at that time, the Fed was expecting growth of 4.15%. Now, it is looking for growth of 2.15% for the full year. Unemployment is expected to remain above the target of 6.5% for at least the next year, while inflation remains below the 2% target.
This economic forecast is not a bullish scenario for stocks.
Analysts at Standard and Poor's were also lowering forecasts. The expected earnings per share (EPS) of companies in the S&P 500 was reduced slightly last week and has been reduced by 6% in the past 12 months.
GDP forecasts and earnings estimates are tools for developing long-term forecasts. In the short term, price-based indicators are useful for traders. Relative Strength Index (RSI) calculated with only two days of data is one such indicator. This indicator, known as RSI(2), is shown in the chart below.
RSI(2) has remained at an extreme value for several weeks at a time over the past six months. In other words, once prices move toward an oversold extreme like they did at the end of last week, they tend to continue down for some time. Based on the current chart pattern, traders should expect to see price weakness for at least the first few days of the week.
For now, the short-term move in stocks (the trend for the next few days to a week) is down. The intermediate-term trend is still up, as is the long-term trend. Those are the trends that are important to watch, and until we see a decisive breakdown, long-term investors should remain bullish.
Gold Still Bearish Despite Gains
SPDR Gold Shares (GLD) gained 4.36% after the Fed's meeting, but ended the week up only 0.11%. A look at the daily closes shows the volatility in that market.
Just like in stocks, we saw a surge after the Fed's announcement and a sell-off before the weekend. Wednesday's gain was GLD's sixth largest one-day gain since January 2001. However, the large one-day gain does not seem to be the beginning of a new uptrend. The weekly chart shows that GLD remains in a downtrend.
RSI(2) is now oversold and is likely to remain oversold for several weeks.
Gold does show a seasonal pattern that bottoms in late October. Some analysts attribute this pattern to buying in India for a holiday. With that bottom more than a month away, there is no reason to buy GLD until prices show signs of strength.
This Week's News
It should be a quiet week with little market-moving news scheduled.