foxex: LYFT and PCE Price Index Bring Out the Bulls

Chart Advisor | Focus on the Price

Friday, March 29, 2019

1. Volatile Lyft jumps and falls in trading debut

2. S&P 500 establishes higher low

3. PCE Price Index encourages traders

Major Moves

One of the signs of a healthy stock market is high demand for, and the successful completion of, initial public offerings (IPOs).

Thanks to the bear market of 2018 and the shock it sent through Wall Street, we haven't seen many big IPOs lately. That ended today.

Shares of ride-hailing company Lyft (LYFT) debuted on the Nasdaq this morning with eager traders pushing the opening price up to $87.24 – a stellar 21% higher than the IPO price of $72 per share the company had set for the stock.

This inflated opening price confirmed traders were both excited about the company's prospects and starved for new stocks to invest in. Anybody wondering if there is still pent up demand remaining on Wall Street had their question answered today.

Unfortunately for those who paid a price between the open price of $87.24 and the intra-day high price of $88.60, LYFT was unable to hold on to its gains. The stock slid down to a mid-day low of $80 before rebounding slightly. It then turned lower once again, falling to an intra-day low of $77.29 before drifting slightly higher to close at $77.75.

When analyzing the performance of any IPO, it is important to remember that volatility in the early days, weeks and sometimes even months is normal and expected. While the company behind the stock has been around for a while and has a proven financial track record, this is the first time traders have been able to express their opinion of the stock in the only way that truly counts: with their pocketbooks.

The fact that LYFT was unable to remain above its mid-day support level at $80 (see the 1-minute chart below) tells me that traders are nervous about potential profit taking anywhere above the IPO price of $72. Falling into the close is rarely a positive sign for a stock.

If traders believe the company is going to use the $2.3 billion it raised today wisely and the stock market remains bullish next week, the stock to climb back up to new highs.

However, $77.29 is going to be an important support level to watch next week. If it doesn't hold, traders may be inclined to push LYFT all the way back down to its IPO price of $72.

S&P 500

The S&P 500 gapped higher at the open the morning, which was a positive sign for the market, but it didn't really move much after that.

Even with the British Parliament shooting down Prime Minister Teresa May's Brexit deal for a third time, traders on Wall Street expressed their optimism that a trade deal could be reached between the United States and China and that the global economy is strong enough to generate strong revenues and earnings for corporate America.

The Technology sector was responsible for most of the positive movement today – with Micron Technology (MU) up 5.06%, Western Digital (WDC) up 5.05% and Seagate Technology (STX) up 4.13% – but the big winners for the day were CarMax (KMX) and Celgene (CELG), which climbed 9.61% and 7.88%, respectively.

Now that the S&P 500 has firmly established a new higher low at 2,785, we will be watching to see if it can establish a higher high next week.

Read more:

What You Need to Know About Lyft's IPO

How an IPO is Valued

The Road To Creating An IPO

Risk Indicators - Federal Funds Futures

Yesterday, I spent some time discussing why traders' monetary-policy expectations are important and how you can monitor those expectations by watching the value of the Federal Funds futures contracts.

Today we got confirmation that traders' expectations that the Federal Open Market Committee (FOMC) may cut the Federal Funds rate by the end of 2019 may be warranted.

The Bureau of Economic Analysis (BEA) released its latest Personal Consumption Expenditures (PCE) Price Index, and it shows that inflationary pressure is weakening, reducing the need for higher interest rates.

The PCE Price Index – the FOMC's favorite gauge of inflation – only rose 1.37% year-over-year last month. This is the lowest monthly increase since September 2016 and is well below the 2% inflation target established by the Fed.

If inflation is falling, the FOMC no longer needs to worry about raising rates to prevent runaway inflation.

However, if inflation slows down too much, the FOMC will have to start worrying about the impact deflationary pressures could have on the U.S. economy and if it should start cutting rates again to combat those risks.

Based on the trend of the PCE Price Index, it looks like the FOMC is going to have to work about deflation before it has to worry about inflation again.

Read more:

'Inflation' Is Not Just One Thing

A Study On The Wealth Effect And The Economy

How does the United States government measure economic growth?

Bottom Line - Signs of Hope

LYFT's strong open above its IPO price – even if it did end up sliding lower throughout the rest of the trading session – and the bullish bump in the S&P 500 are two signs of hope that traders are still bullish and want to be even more bullish, given the opportunity.

This bullishness on Wall Street is backed up by today's rebound in the University of Michigan Consumer Confidence report. The confidence index rebounded from last month's reading of 93.8 to 98.4 – its highest level since last October.

We also saw New Home Sales rocket back up to 667,000 in March – its highest level since June 2018. This rebound is due largely to the decline in mortgage rates we have been discussing.

All in all, it has been a great Q1 on Wall Street, and the foundation is set for a continued move higher in Q2.

Bond yield curve holds predictive powers

Learn the basics of investing

How can we improve the new Chart Advisor? Tell us at chartadvisor@investopedia.com