Commodities, every sector and global markets opened strong Wednesday on uplifting employment and industrial productivity news. But nearly everything lost momentum after the Federal Reserve announced it's leaving the benchmark interest rate unchanged at nearly zero.
Gold, silver and oil, up 0.6% to 0.9%, tacked onto Tuesday's gains in heavy volume. SPDR Gold Trust (NYSEArca:GLD - News) soared to an all-time high of 107.09 as the dollar weakened. PowerShares DB U.S. Dollar Index Bullish (NYSEArca:UUP - News) lost 0.75% after hitting resistance at its downtrending 10-week moving average.
India and Korea ETFs, up 3%, led overseas action, but closed in the lower end of their intraday range. They're struggling to regain their 10-week averages.
Health care and chip ETFs led sectors to the upside but also closed in the lower end of their intraday ranges. Regional banks and real estate, down 2%, sold off in the last hour of trading.
Volatility was expected after the FOMC statement, even though its decision was hardly a surprise. The main question now is whether the market is just pulling back within an uptrend or starting to roll over.
"Although we expect the recovery to be weak, we don't see a double dip," said Alec Young, an equity strategist with Standard & Poor's Equity Research. "We see earnings going up next year. The markets are going to slow from a gallop to a grind."
Although data show the economy is improving, it's still not strong enough to raise rates. The earliest the Fed will raise rates will be the middle of next year, Young says. He projects the S&P 500 will reach 1150 over the next 12 months, up 9.9% from Wednesday's close at 1046.51.
"Based on relatively anemic returns available in Treasuries and money market funds, the stock market is likely to remain the asset class of choice, even if returns moderate," Young said.
He's recommending an overweighting in cyclical sectors such as industrials, energy and basic materials and an underweighting in utilities and telecom. He expects international markets, especially Asia, to outperform the U.S. on the belief that the dollar will weaken more, thereby boosting commodities, the main export of emerging markets.
The Bearish Case
The bears contend the rally that vaulted the S&P 500 up 65% from the March low to the October peak has run out of steam, even as the market enters its historically best six months of the year. Stocks that drove the rally have begun to falter.
"The Nasdaq, financials, real estate, banks, transports, and small caps, which led the rally off the March lows, have been leading it down" said Simon Maierhofer, founder of ETFGuide.com. "If the Nasdaq starts falling faster than the Dow Jones or S&P 500, it shows people are getting more risk averse."
Real estate, as tracked by iShares Dow Jones U.S. Real Estate ETF (NYSEArca:IYR - News), rocketed 121% from its March low to its 52-week high. It peaked in mid-September and has been stair-stepping south, forming lower highs and lower lows.
Chips, which started outperforming the market in November and didn't undercut its November low in March like the rest of the market, peaked on Sept. 11. The group, as tracked by SPDR S&P Semiconductor (NYSEArca:XSD - News), has fallen 11% from its 52-week high and trades below its 10-week moving average.
By contrast, both the Nasdaq and S&P 500 hit a 52-week high on Oct. 21. The S&P recovered its 10-week line Wednesday and trades just 4% from its new high. The Nasdaq has slipped below the key 10-week line. And it's trading 5% below its 52-week high.
Maierhofer recommends conservative investors start nibbling on inverse index ETFs such as ProShares Short S&P 500 (NYSEArca:SH - News) or ProShares Short QQQ (NYSEArca:PSQ - News), which rise in price when the underlying indexes fall.
Snapback Seen
The market is in the "throes of the largest decline since the bull run began in March," according to Paul Schatz, president and chief investment officer of Heritage Capital, based in Woodbridge, Conn.
"The first leg down was serious enough in price, advances/declines and up/down volume to generate a stretched rubber band that needs to snap back first," Schatz wrote in a client note. "Far too many sectors went from behaving with a bit of caution to outright poorly, and no other groups have exhibited constructive enough behavior to take over."
Schatz projects the Dow will slide to 8800, down 10.3% from Wednesday's close of 9811, through the end of late November or early December. He sees the S&P falling back to its June high of 955, down 8.7% from Wednesday's close.
