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Mixed Messages Lead to Volatile Market Reactions

Yesterday, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell appeared in a virtual Capitol Hill testimony. Today, Yellen and Powell also appear in testimony with members of the Senate Banking Committee. The focus of the two hearings was to address the Covid-19 stimulus package and its impact on the economy.


During the meeting with the House Financial Services Committee, Yellen and Powell answered a wide range of questions concerning the US economy, stock market, climate change, and other issues. The pair reiterated the US economy has made progress over the last year but continues to emphasize that more work remains.


Surprisingly, the stock market reacted negatively to the Capitol Hill and the Senate Banking testimonies as investors were hoping for a more optimistic and firmer message from Powell. Investors focus on Powell's conflicting views - claiming that the economy is much-improved, but at the same time stating the recovery was far from complete. The mixed messages conveyed by Chairman Powell led to choppy trading in major market indexes.


Since the beginning of the year, the Nasdaq 100 Index (NDX) has conveyed mixed signals, as evidenced by three bullish gap-ups and three gap downs. NDX has recently struggled to clear above the 50-day ma (13,177) and above initial resistances coinciding with the 2/24, 3/2, and 3/16/21 highs (13,297.5-13,312). Although NDX remains comfortably above its 200-day ma (11,890.95), the discrepancy between the two moving averages (50 and 200-day) warns of further volatile trading in the days and weeks ahead. The broader-based Nasdaq Composite (COMPQ) is showing similar choppy trading conditions, as it has also failed to surpass the 50-day ma (13,428) but remains well above the 200-day ma (11,848).


After a sharp rally to start the New Year, the S&P 600 Small-Cap Index (SML) has recently slipped below its 50-day ma (1,282) for the first time since the late-Oct 2020 near-term setback. Key support resides near the 3/5/21 reaction low at 1,249.40. The index is also trading far from its 200-day ma (1,020), opening the door for the index to fill its large 1/7/21 gap-up (1,139-1,189.5) under selling pressure. The Russell 2000 ETF (IWM) also broke below the 50-day ma for the second time in the past two weeks, suggesting traders are taking short-term profits. The next key support for IWM is at 204.84-207.21 (1/29 and 3/5/21 lows).


On the positive side, the Dow Jones Industrial Average (INDU), Dow Jones Transportation Average (DJT), NYSE Composite (NYA), S&P 400 Mid-Cap Index (MID), and S&P 500 Index (SPX) are still trading above their respective 50-day and 200-day moving averages.


In conclusion, the marketplace has been sending out mixed signals. It may be nothing more than near-term jitters due to the lack of clarity from Chairman Powell. It may also be portfolio rebalancing by professional money managers into the end of the quarter, impacting indexes, sectors, and stocks. The mixed trading responses are cautionary but not necessarily an ominous sign of the end of the 1-year bull rally. When the major indices are not in agreement, it is reasonable to expect price actions will be more volatile. Shorter-term momentum type traders often step to the sidelines. Will the start of a new quarter next week bring more clarity to the marketplace?


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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