foxex: Traders Rejoice as Fed Gives Banks Passing Grades on Stress Tests

Chart Advisor | Focus on the Price

Friday, June 28, 2019

1. Banks Jump on Stress Test Results

2. S&P 500 Ends Week on a High Note

3. Even OPEC Supply Cut Rumors Can't Push Crude Oil Higher

Major Moves

The Fed gift-wrapped gains for stock investors today when it announced that all 18 banks it has been reviewing have passed round two of their stress tests.

The Fed conducts stress tests on important financial institutions each year to ensure they are sufficiently capitalized to withstand a large economic shock.

The results of this year's stress tests are especially bullish because they open the way for the country's largest banks to return more capital to their shareholders in the form of increased dividends or expanded share buyback programs.

Traders have been rewarding stocks with strong dividends and aggressive buyback programs for the past few years as economic and geopolitical uncertainty have made forecasting organic revenue and earnings growth more difficult.

Dividend payments provide a guaranteed yield, and with share buyback programs, you know that a company's earnings per share (EPS) are going to increase.

Banking stocks jumped across the board today as traders believe the major financial institutions are going to increase their payout levels to greater than 100% of expected earnings.

You can see the bullish jump on the Financial Select Sector SPDR Fund (XLF) chart below. The fund completed a longer-term diamond bullish continuation pattern by breaking and closing above the down-trending resistance level that has been interacting with the stock during June.

XLF was driven higher by Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) – which rose by 2.80%, 2.72% and 2.23%, respectively today.

S&P 500

The Financial sector helped drive the S&P 500 higher to close the week, but it wasn't the only sector with bullish activity today.

The top two performing stocks in the index – Western Digital (WDC) and Constellation Brands (STZ) – are in the Technology and Consumer Goods sectors, respectively. WDC gained 6.73%, and STZ gained 4.64% today.

The index would have likely gained even more ground if two of the index's largest companies – Apple (AAPL) and Amazon (AMZN) – hadn't pulled back.

AAPL lost 0.91% as traders continued to react to the news that chief designer Jony Ive is leaving the company to start his own firm.

AMZN lost 0.56% as traders continued to take profits off the table heading into the weekend. AMZN has stagnated for the past week, but I would be surprised if the stock doesn't resume its uptrend soon.

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Risk Indicators - Crude Oil

I've been intently watching the price of crude oil for the past few months as it has been drifting lower.

I think crude oil is a great barometer for the global economy. When traders believe the global economy is going to be growing, they tend to push crude oil prices higher in anticipation of higher demand. When they believe the global economy is going to be contracting, they tend to push crude oil prices lower in anticipation of lower demand.

However, global demand isn't the only factor that impacts crude oil prices. The price of crude oil is also impacted by the supply levels.

That's why today's decline in crude oil prices is so interesting.

Crude oil hit down-trending resistance at $60 per barrel and started to pull back at the same time news was breaking that the Organization of Petroleum Exporting Countries (OPEC) plans to extend its oil production cuts through the second half of 2019.

OPEC officials will be meeting on Monday to officially announce the cartel's plans, but it appears traders do not believe the extended cuts will be enough to offset flagging demand from China as the Chinese economy continues to struggle against U.S. imposed tariffs.

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Bottom Line - Structurally Fair Market

We continue to operate in what is often referred to as a "structurally fair" market. That means fundamentally sound companies are seeing their stock prices do well and less-secure companies are seeing their stock prices struggle.

This should give traders confidence that if they do their homework, they have a high likelihood of being rewarded.

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