Next Stop: The Fed

 | Sep 16, 2011 | 4:50 PM EDT  | Comments
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If you only glanced at the indices today, it looked as if it was a great week for traders.

The S&P 500 was up every day and jumped more than 5% for the week. You'd expect to see lots of high fiving and chest thumping among the bulls, but that was not the case. The main emotion was disappointment, as many market players were surprised by the straight up move and never managed to reposition themselves.

What caused the most consternation for traders was unrelenting buying despite great skepticism over the latest efforts to end Europe's sovereign debt issues. It was easy to talk yourself out of a bullish bias given the news flow.

Ironically, a high level of negativity and a great amount of skepticism drove the action. Market players were not positioned for anything positive and when the market started to run, they kept it going as they scrambled to keep pace. It was a classic example of how contrarian thinking is supposed to work.

I'm not sure that this week's action changed many opinions about the health of the European or the U.S. economies, but it probably did change some thinking about putting money to work. Market action like this causes skeptics to hold their noses and buy because they can't stand being left behind. That often turns out to be a poor strategy but the bears, who argued that all week, were the ones underperforming.

Things won't be any easier next week. We have an extremely important meeting of the Fed. Expectations for some form of quantitative easing are extremely high and we are likely to see a major move when if that news hits on Wednesday at 2:15 p.m. EDT.

Despite the big move this week, the market is still in the trading range that began after the breakdown in early August. We started the week near the bottom of the range and are now back near the top and running into technical overhead. The fact that we were quickly overbought didn't make much of a difference this week, but it does increase the risk of a sell-the-news reaction to the Fed next week.

I'm happy to close the book on this week of trading and will regroup over the weekend. The good thing about trading is that you can be sure that there will always be a new set of opportunities if you keep on plugging away.

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

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