US Stocks: Loving the Fed
• Bullish tint in biotechnology sector
• Transportation stocks looking good
Let's take a quick step back and understand the near-term structure of the US stock market. After bears got obliterated two weeks ago by the European Central Bank and the better-than-expected May jobs report, they took another hit on Wednesday as the US Federal Reserve threw them a perfect curve ball. Janet Yellen & Co decided to taper quantitative easing by another USD 10 billion, which, at the margin, is a more hawkish sign and shows more trust in an economic recovery. At the same time, it also reiterated its low interest rate policy, which the bulls loved to jam stocks higher.
Fund managers now have a little more than one week to close out the first half of the year in some sort of positive way, and this so-called performance anxiety is literally palpable as I make my weekly rounds with fellow traders and hedge fund managers. The low volatility and low directionality tape that plagued investors for most of the first half in recent weeks finally resolved higher in price, probably leaving most US equity investors lagging in performance versus the S&P 500, thus forcing them to chase 'em higher into quarter-end.
My favourite US equity index to watch for near-term support and resistance also for the broader US stock market is the Russell 2000 small capitalisation index. The Russell 2000 is a much better indicator for the US economic picture than its larger sibling the S&P 500 (SPX.I), as many of its constituent companies see most of their revenue from within the US economy. Two weeks ago, I highlighted the diagonal resistance line that the Russell 2000 was bumping into and what many bears declared as an important lower high. Since then, the index has simply consolidated in a constructive manner and with Wednesday's move broke higher still. While I still feel more comfortable buying the S&P 500 towards my upside target between 1,970 - 2,000, the Russell here can easily work back towards the 1,210 area, which would equate to its March all-time highs.
Source: Saxo Bank
Other clues that investors are chasing stocks and thus jamming them higher is by noticing the bullish tint of the biotechnology sector. Remember, this sector got spanked badly this spring but its bounce-back off the April lows has been vicious. In recent days the Nasdaq Biotechnology ETF (IBB:xnas) began to consolidate in a tight fashion and some single-name stocks within the group already began to break higher.
Source: Saxo Bank
All in all, stocks, while still playing in the late part of a cyclical bull market, continue to look good higher. The transportation stocks look good too, and until they begin to lag somewhat the better odds remain on the long side of the market.
-- Edited by Kevin McIndoe
Serge Berger, an active trader since 1998, is a leading specialist in Trend Following. Read more of his regular commentary on our social trading site here.