foxex: S&P 500 Support Holds on Late-Day Rally

Focus on the Price

Tuesday, December 18, 2018

2. S&P 500 survives another attack on support

3. Are investors becoming more "discretionary"?

Major Moves

Wall Street appears to be playing whack-a-mole this week. Just as one bearish concern gets resolved, another one pops up, mocking investors and daring them to take a swing at it.

Earlier this week, investors were concerned the Trump administration was prepared to force a partial government shutdown if its demands for $5 billion for a border wall weren't met. Now it appears a shutdown has been averted as the President is willing to look for "other ways" to fund the wall.

Unfortunately, right after that risk was apparently resolved, crude oil prices accelerated their decline below $50 per barrel, closing at $46.60, the lowest price point since August 31, 2017. The growing fear that oil production is going to outstrip demand dragged the PHLX Oil Service index down 2.32% today.

This bearish move was offset somewhat by speculation – fueled by President Trump's twitter onslaught against a tighter monetary policy – that the Federal Open Market Committee (FOMC) might not raise rates at its meeting tomorrow. Or if it does, that it might at least indicate a slowdown in interest-rate hikes in 2019.

Interest-rate speculation helped fuel the rebound in tech stocks that drove the PHLX Semiconductor index up 1.64%.

At the end of the day, the S&P 500 remained virtually unchanged (up 0.01%) while the Dow Jones Industrial Average and the Nasdaq Composite rose slightly (up 0.35% and 0.45%, respectively) as traders wait for tomorrow's FOMC announcements.

S&P 500

The S&P 500 has established a few key support and resistance levels during 2018 that have served as warning levels for investors. Perhaps the most important of these levels is 2,532.69, the low the index established on February 9 after stock prices collapsed as long-term interest rates began to climb.

For the second straight day, the S&P 500 has tested this support level.

As I mentioned yesterday, the S&P 500 cracked support, falling to a new 2018 intra-day low of 2,530.54, only to bounce back higher and close slightly higher at 2,545.94.

Today, the index dropped even lower, reaching an intra-day low of 2,528.71 before recovering and closing above support at 2,546.16.

Read more:
What determines oil prices?

Selloff Pushes Russell 2000 Into Bear Territory
Goldman Sees Bull Market In 2019 Despite Investor Pessimism

Risk Indicators

One tool analysts often use to gauge investor sentiment on Wall Street is a relative strength comparison chart between the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Consumer Staples Select Sector SPDR ETF (XLP).

When investor sentiment is bullish, Consumer Discretionary stocks tend to outperform Consumer Staples stocks as investors look to invest in growth stocks.

Conversely, when investor sentiment is bearish, Consumer Discretionary stocks tend to under-perform Consumer Staples stocks as investors look to invest in more stable stocks.

Looking at a relative strength chart comparing XLY to XLP shows that Consumer Discretionary stocks have been under-performing Consumer Staples stocks since October, with the chart reaching a low on November 20.

Positive Black Friday and Cyber Monday sales numbers helped stop the free fall in Consumer Discretionary stocks, but the relative strength chart is still consolidating.

Consumer Discretionary stocks gained some ground today, showing investors are hopeful a less "hawkish" FOMC announcement might give the stock market the boost the bulls have been waiting for, but we'll have to wait until 2 p.m. EST tomorrow to confirm.

Understanding Consumer Staples Stocks
Comparing Consumer Discretionary Mutual Funds to XLY (VCDAX)

Bottom line: All Eyes are on the FOMC

If traders like what the FOMC has to say tomorrow, long-term support on the S&P 500 should hold, and Consumer Discretionary stocks should continue to gain on Consumer Staples stocks.

If traders don't like what they hear, the S&P 500 will reflect their displeasure by closing below this level, and Consumer Staples stocks will continue to outperform Consumer Discretionary stocks.

What is relative strength?