Major Moves

The major indexes struggled to remain above breakeven today, despite some positive movement in the energy market. The Boeing Company (BA) dragged on the Dow after weekend reports detailed a too-cozy relationship between the company and its regulator's approval process. The Nasdaq and S&P 500 also suffered a little as big tech struggled to shake off a rare Facebook, Inc. (FB) downgrade.

Meanwhile, OPEC deferred a decision on whether to continue its production cuts until June, which is essentially the same thing as an extension of OPEC's production cuts for a few more months at least. The announcement drove oil prices slightly higher, which has been good for the energy sector within the S&P 500.

The move higher in energy is also a positive change for emerging markets (EM). Oil prices and EM have a high level of correlation for two reasons. First, many EM economies, like Mexico, are also major oil producers. Second, demand for commodities is often driven by EM themselves when industrial production is rising. The first factor is playing a much more significant role right now than the second, which puts EM at risk of a reversal if OPEC changes its posture in the near term.

The current rally in oil prices is a continuation of the breakout from a bullish inverse head and shoulders pattern in February. Oil prices retested the neckline and have since continued to the upside. This technical pattern has been emerging in other asset classes with greater frequency in recent weeks.

I ran a screen today and found that 14 inverse head and shoulders patterns have appeared and been confirmed this month alone among stocks with a market cap larger than $2 billion, including Aflac Incorporated (AFL), General Mills, Inc. (GIS), Dril-Quip, Inc. (DRQ) and a few others that all completed their own patterns on Thursday of last week. In my experience, although there are still major issues facing the market, this confluence of signals is justification to keep a bullish outlook.

Chart showing the performance of light crude oil futures

S&P 500

As I mentioned previously, the S&P 500 was stunted by both underperformance among tech names, like Facebook, and slowing among dividend payers in the utilities sector. I don't expect the weakness in utilities to continue for any fundamental reasons. Interest rates remain flat, and if the Fed keeps its dovish stance, investors will still likely be cautious enough to favor more conservative stocks.

Although weak trading in tech stocks was a problem for the S&P 500 today, the index remained within its breakout range above 2,800. I believe it is reasonable to expect the S&P 500 to reach its short-term pivot in the 2,875 range if the Fed's statement on Wednesday both reaffirms a positive outlook for the economy and a dovish stance against further rate hikes in the short term.

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Chart showing the performance of the S&P 500 Index

Risk Indicators – Transportation Earnings

In the middle of each quarter, a few important companies, like FedEx Corporation (FDX), release mid-season earnings reports that provide some early insight into the status of the business cycle. FedEx will be reporting on Tuesday after the market closes. The stock isn't a perfect bellwether for the rest of the season, but it is worth watching.

For example, the negative disappointments from FedEx in both September and December 2018 preceded major declines in the market indexes. Conversely, the positive surprises in both September and December 2017 signaled a continued rally in the major indexes.

Traders care about stocks like FedEx because they are an important component of the transportation sector. If the S&P 500 is at new short-term highs, technical investors will require confirmation from transportation stocks, which should also be at new short-term highs, before considering the rally to be confirmed. So far, that confirmation has been missing, which may be one of the reasons large investors have been slow to move back into risky sectors.

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Chart showing the performance of FedEx Corporation (FDX)

Bottom Line: Prepping for the Fed

The Fed's FOMC meeting will take place this Tuesday and Wednesday. This meeting will also feature a new update to the Fed's projections for economic growth and interest rates. At this point, I expect the Fed to reaffirm expectations for no further rate hikes this year – that should help to provide support for equity prices.

According to the CME Group's Fed Watch Tool, bond traders are pricing in a 95%+ probability that the Fed will not raise or lower the target interest rate on Wednesday. Further, traders are pricing in a nearly 70% chance that the target rate will still be the same in December, with a 30% chance that it will be lower.

This much consensus is a good sign that we won't see much volatility on Wednesday. But if there are any missteps in the Fed's statement or Chair Powell's press conference, the magnitude of the reaction could be high. I expect this meeting to pass smoothly, but it is always good to be on alert for the unexpected during these announcements.

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