Major Moves

Market participants set aside the debate about President Trump's picks for the Federal Reserve board (Herman Cain and Stephen Moore) to review the Fed's minutes of the most recent FOMC meeting. The minutes for each meeting are released three weeks after the Fed meets and can be market-moving events of their own.

What investors seem to be looking for is a reaffirmation that the Fed will resist raising the overnight interest rate, or Fed Funds Rate, and reducing the Fed's balance sheet, which could raise longer term rates. Traders feel that if rates remain low, there are better prospects for growth in the short term. Historically, the causal relationship between very low interest rates and growth is tough to prove, but low interest rates don't seem likely to hurt growth either.

The Fed minutes pointed at declining growth rates in the fourth quarter last year and the first quarter this year, along with deeper economic pullbacks in Europe and Asia, as reasons not to raise interest rates. A persistently low level of inflation has also contributed to the Fed's reluctance to tighten monetary policy.

Stocks rallied following the Fed minutes, while long-term Treasury bonds remained flat. This isn't an abnormal reaction to news like this. However, if long-term Treasury bonds were to continue rising in value, I would be much more concerned about a decline in equities.

As you can see in the following chart, the iShares 20+ Year Treasury Bond ETF (TLT) is at a key support level, even with the gap in March and the prior high in January. Despite the unusual correlation this year, long-term Treasuries and stock prices usually trend in opposite directions. A continued rally in TLT would be an indication of weakness in stocks.

Performance of the iShares 20+ Year Treasury Bond ETF (TLT)

S&P 500

The S&P 500 made some progress back toward the upper trendline of its rising wedge pattern following the news from the FOMC. Although stocks don't look bearish, the difference between the open price on Monday and the close price today is virtually non-existent. As I mentioned in Monday's Chart Advisor issue, traders are probably on hold while they wait for the big banks to start reporting on Friday.

Although earnings are likely to be disappointing, revenue numbers should still show growth. Additionally, the promise of sustained low rates means it will continue to be easy for companies to service and roll over their debt. This is particularly important in the heavily leveraged oil sector. High-yield bonds were one of the biggest outperforming groups today because of the FOMC's report.

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Performance of the S&P 500 Index

Risk Indicators – Pricing More Risk Into Banks

Most market risk indicators (besides the yield curve) have remained calm this week. However, I have been watching an interesting development on a more micro level. In the following chart, I have compared The Goldman Sachs Group, Inc. (GS) with a version of the VIX ("fear index") based on that stock alone. So rather than reflecting volatility expectations for the entire market, this index is focused only on GS itself.

What you can see in the chart are equal highs between March 19 and April 5, which are matched by lows on the GSVIX that are rising. What this means is that, the second time the price rose to $204 per share, investors were less confident than they were at the prior high. I usually refer to this signal as a "VIX divergence."

In my experience, if investors' confidence is lower at the second equal or higher high, as it is in this case, the risk of a negative reaction to news is elevated. I don't believe investors should extrapolate anything from this signal about the entire market, but it indicates that traders are nervous about the bank reports and the risk of a downside shock in that sector is elevated.

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Performance of The Goldman Sachs Group, Inc. (GS)

Bottom Line - Wait and See

JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) will report earnings on Friday. Until then, I expect that investors will keep the market range bound. Volatility signals from Goldman Sachs urge some caution, but overall, I think a poor showing this earnings season has already been included in the average price of the S&P 500.

In addition to earnings, there are three members of the FOMC (Williams, Clarida and Bullard) that will be giving speeches tomorrow morning where audience questions will be expected. In the past, Fed Governor Bullard's speeches have generated market-moving news. His impact has been more muted over the past six months, but I will still be monitoring his remarks closely just in case.

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