Date: March 14, 2016

FOMC & Options Expiration the Themes for the Week

The Dow, S&P 500 and S&P 400 enter the new week at their highest levels of 2016. That surprised me when I did my weekend review. I would bet that most people think stocks are much lower than they actually are. Last week was another big victory for the bulls, much to my delight. Day in and day out since February 11, investors have disavowed and laughed at this rally. However, all we have seen in historic participation and strength since the rally began.

Four times since February 11th, stocks have become short-term overbought and all four times, the best the bears could muster was a two day, mild pullback. That in itself continues to be a sign of underlying power that typically doesn’t dissipate so quickly. The Dow and the S&P 500 are quickly approaching the opening gap created on January 4th when stocks fell sharply to begin the New Year. That’s 17,425 on the Dow and 2044 on the S&P 500. Those levels should create the landscape for another short-term pullback.

This week, we have options expiration and the Fed meeting to deal with. Historically, March expiration week has been nicely positive for stocks. That trend should continue into the Fed announcement on Wednesday. With stocks rallying so sharply into the Fed, the trend says they continue early this week and then pullback modestly on the other side of the meeting.

Three of my four key sectors are acting great with only the banks in question. Tomorrow, I will spell out three scenarios for the banks based on the Fed’s decision that should have some legs into next quarter.

High yield bonds continue to power higher and that behavior should not be underestimated. If junk bonds hold on to these gains, it will be very difficult for the stock market bears to make any meaningful headway.

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Paul Schatz, President, Heritage Capital