A range-bound market is a range-bound market until it isn't. On Wednesday the stock market showed that it is still a range-bound market as a notable rally effort in the early-going dissolved into a late-day selling fest.
The reported catalysts for the reversal were some hawkish-sounding FOMC Minutes and a soundbite from House Speaker Ryan who suggested the tax reform process could take awhile since the House, Senate, and White House are not on the same page yet with a reform plan.
The impression of the minutes revolved largely around two perspectives in the minutes: (1) most participants judged a change in the reinvestment policy would likely be appropriate later this year if the economy continued to perform as expected and (2) some participants viewed equity prices as quite high relative to standard valuation measures.
To us, the only real halting comment was the one about the change in the reinvestment policy later this year. That is a de facto tightening approach, and although some officials have been talking up the notion of balance sheet normalization, it struck a chord we think because the market wasn't altogether ready for such a shift -- should it happen -- to begin before the end of the year in the wake of multiple rate hikes perhaps.
In terms of Mr. Ryan's remarks, was that really a startling revelation? We think not after the health care reform bill boondoggle and the plenitude of headlines discussing the lack of agreement on how to tackle tax reform without increasing the deficit.
Meanwhile, are the Fed's concerns about equity valuations, which were expressed only by "some participants" we might add, really a startling perspective? We think not when taking into account that many other respected market experts outside the Fed have made a similar observation for months (if not years).
This awareness of matters looks to have set in overnight, as the S&P futures aren't pointing to any significant follow-through selling at the open.
Currently, the S&P futures are up three points and are trading slightly above fair value.
A rebound in oil prices ($51.44, +$0.29, +0.6%), more talk of a potential infrastructure spend, an encouraging initial claims report, and the word from ECB President Draghi that there is no need right now to change the ECB's easy policy stance have helped provide a measure of support.
We suspect, too, that market participants are respecting the 50-day simple moving average for the S&P 500, which comes into play at 2346/2345 and has been a staunch level of technical support since the election.
If that support level breaks, though, there could be an increase in selling pressure, whereas another nice bounce could ensue if it holds.
Once again, everyone will have to wait to see what happens, but bear in mind now that it is a key area being watched by traders.
In the same vein, the summit between President Trump and Chinese President Xi Jinping, which begins today, is also going to be closely watched by market participants given the various points of contention -- trade, North Korea, the South China Sea, and Taiwan to name a few -- that are expected to be discussed.
Any sense that the summit is proceeding in a very amicable way could give way to a relief rally in the next few sessions. Conversely, less amicable-sounding communications could spark the opposite.
With respect to the initial claims report, it showed claims decreasing 25,000 to 234,000 (Briefing.com consensus 245,000) for the week ending April 1. Continuing claims for the week ending March 25 decreased 24,000 to 2.028 million.
This data won't affect the outlook for Friday's Employment Situation Report, yet it continues to be reflective of an improving labor market.