Expect Some Fireworks

 | Jun 28, 2013 | 4:23 PM EDT
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You know that panic we had when Ben Bernanke mentioned that the Fed may taper off its bond buying in the next year. Well, never mind – apparently, it isn't an issue after all. A number of Fed members came out and told us not to worry about it, bonds settled down a bit and stocks managed a big rally. So why should worry about it? The Fed is still our friend and it will make sure the market doesn't forget it.

Maybe I'm being a little sarcastic but the bulls have done a nice job of shrugging off those interest worries over the last few days. They had some help from end-of-the-quarter window dressing and index rebalancing but the attitude was that the market overacted to the Fed, which will continue to be very supportive.

Despite the better action, the indices didn't quite repair the damage that had been done on the Bernanke selloff. In particular, the S&P 500 failed to regain its 50-day simple moving average and most of the bounce took place on lower volume. It looks like nothing more than a good-sized oversold bounce into resistance, but we all know how the market has had a tendency to just keep going when it reaches this point.

Bond yields did come back down a bit but not that much. The iShares Barclays 20+ Year Treasury Bond (TLT) definitely illustrates that there is some major concern about where interest rates are headed in the near term. The bulls will need to overcome that if they are going to put this market back on an upward trek.

Earnings season is coming up in a couple weeks and that will likely be the main catalyst for the market's next big move. There doesn't seem to be much optimism about earnings at this point, but that will evolve before the main reports are issued.

Overall, the market is still technically in poor shape, but it is working hard on the V-shape move that always makes the technicians look out of touch. With next week's Fourth of July holiday generating lower volume, we will have good conditions for bouts of higher volatility and dull trading.

Have a great weekend. I'll see you on Monday. 

June 28, 2013 | 10:28 AM EDT

Playing Some Defense

  • But I do have two things on my radar.

The V-shaped bounce is faltering and we are finally seeing some backing-and-filling after a good sized bounce.

We went from oversold to overbought very quickly and now we need some consolidation. The fact that is the last day of the quarter is probably driving some money managers to lock in gains now that the bulk of window dressing is done. I am generally inclined to sell down some of the things that have bounced recently in hopes of buying them back at better prices later on.

Interestingly, the very weak Chicago PMI was treated as bad news by the market rather than an excuse for the Fed to be more dovish. The iShares Barclays 20+ Treasury ETF (TLT) is down, which, once again, shows lack of confidence in the Fed despite the recent attempts to talk the market back up.

I'm playing defense and trying to protect gains right now, but there are a few things on my radar I'd like to add later in the day if he action shapes up. Albany Molecular Research (AMRI), for example, is a great-looking chart and I'll be looking for a breakout move there.

InvenSense (INVN), which was my stock of the week, is finally acting like a stock of the week and is breaking over its pivot point on decent volume. I hear some talk that they may have won some Apple (AAPL) business, but I have no confirmation of that other than the price action.

At the time of publication, the author was long AMRI and INVN, but positions could change at any time.

June 28, 2013 | 7:48 AM EDT

To V or Not to V?

  • The question is a bit more interesting this time.

"Keep in mind that neither success nor failure is ever final." -- Roger Babson

We wrap up the first half of 2013 today and overall it has been a resounding success for the bulls.

But as we look ahead there is no shortage of major issues impacting trading.  Most notably Fed members have managed to drive bond yields back down after a series of comments about how the market overacted to Ben Bernanke's comments last week. Yields are still well above where they were before the last FOMC policy decision, but the market seems to be embracing the idea that the Fed isn't going to make any quick moves, especially if the economic recovery remains slow.

Interest rates are going to continue be the primary driver of the market and we will be highly sensitive to any and all comments coming out of the Fed.  But the Fed seems determined to calm the market and reassure us that quantitative easing is still in place and that tapering doesn't mean that we will lose Fed support.

This drama over interest rates has created a very interesting technical pattern for the major indices. We've seen a classic breakdown through key areas of support followed by a textbook bounce back up right into resistance areas.  We are at the juncture now where some sort of consolidation or backing-and-filing would make sense, but where there has often been a tendency to keep running and produce further V-shaped moves.

The debate over whether we will V or not V is a bit more interesting this time, since we corrected much deeper and on more volume. It is much more work and takes much more buying power to go straight back up without some sort of consolidation along the way. The bulls have had an additional boost from end-of-the-quarter window dressing, but that fades away today just as the S&P 500 approaches key overhead at the 50-day simple moving average.

Textbook technical analysis suggests that the indices should struggle at this point, but the Fed has consistently trumped TA the last four years and we have to be aware that it could easily happen again. The bulls are regaining confidence quickly as bonds rally and overseas market recover. The ranks of the dip buyers will be replenished and the dynamics that drove this market up for the first half of the year are still there.

Trading today is going to be more random than usual due to the rebalancing of the Russell indices. More than 3000 stocks will be impacted to varying degrees and we will have a huge surge in volume at the close as the index funds make their adjustments. 

Many traders try to game the Russell rebalancing, which is not at all easy to do. Just because a stock is being added to the index doesn't mean it is going to trade up today. The index funds have been anticipating this for weeks and they acquire shares using a variety of approaches to ensure they receive the best price possible. Be careful about assuming that a Russell addition means a price spike in a specific stock today.

We have a mild start to the day and after the run we have had the last three days there may be some inclination to lock in gains as we wrap up the quarter.   Of course, taking a bearish stand when we have had a big run has been one of the biggest losers of 2013 and thinking that today may be different is not an easy bet.



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