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My Latest Take On the Market

February 27, 2018, 10:48 am

Stocks have felt some pressure over these past few weeks, due in large part to the rise in the 10-year Treasury yield. It’s been a slow but steady climb in yields since September, and while some of the rise was for good reason – a stronger economy and higher demand for money – some of it was also negative as the supply of bonds is increasing with rising government budget deficits. This is poor timing with the Federal Reserve beginning to withdraw support that has been crucial in keeping a lid on rates as the economy recovered.

We will hear from the new Fed Chair Jerome Powell during his congressional testimony this week. He’s not likely to change plans to raise rates three times this year, but Wall Street will be looking for clues on Powell’s philosophy. I expect Congress to question his statements from 2012 when he was critical of quantitative easing (QE) due to concerns that bubbles were being created in financial assets. If he walks back some of these statements and indicates that market conditions could be a part of the Fed’s consideration when raising rates, Wall Street may finally relax and trigger a market rally. If Powell chooses to stand by his previous views, we could see another sell-off.

Outside of the Fed, we’ll also get the typical beginning-of-the-month economic data, including auto sales, global PMI reports and the February jobs number. Even though Wall Street is more concerned with rates, I don’t think we’re in an environment where bad news is good news. Some analysts, including famed hedge fund manager Ray Dalio, are expressing concerns over a slowing economy. While it is possible we’ll see the overall growth rate stall a bit, it will still be solid. This would put us in a welcomed “Goldilocks” market environment, which should also support stocks.

SP 500 Chart

Given these factors, the next two weeks will be critical for stocks. As you can see in the chart above, the S&P 500 has good support at 2,690 and 2,650, which I expect to hold for now. I do not anticipate a test of the lows of two weeks ago in the near term, but last Wednesday’s high of 2,747 could turn into resistance.

This is a bit of a tricky environment, but keeping a focus on quality stocks with a good mix of technicals and fundamentals should help you do well regardless of where the market turns next.

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