The Market Got What It Wanted

 | Sep 18, 2013 | 4:21 PM EDT
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The great irony of this market is that we are celebrating the fact that the economy is still so poor that the Fed feels obligated to continue to supply as much stimulus as possible.

Despite the billions of dollars already "invested," we are still struggling and Ben Bernanke believes it could be a couple of more years before employment is at reasonable levels.

The funny thing is that this is exactly what the market wanted. It is hooked on an endless supply of cheap money, and the announcement of no tapering put the machines into buy mode and they just kept going. Usually, we dance around a bit to the FOMC decisions, but today's move was a surprise and an obvious positive one for the market that has been living off QE for years.

The hard part is that action like this punishes disciplined, prudent traders. If you are unwilling to chase overextended stocks with no close-by support, you end up feeling foolish. The way to win in this market is to buy the most extended stocks with the highest level of relative strength and count on them going even higher. At some point, we will pay a price for this behavior, but not today -- and maybe not anytime soon.

I have to admit that I'm disappointed that we didn't have greater volatility today rather than another lopsided move straight up. I miss the ebb and flow that used to occur regularly. But if you want to make money now, you have to have the chase mentality. Those who don't embrace this price action will fail to keep up.

It will be interesting to see tomorrow if maybe the fact that the Fed thinks the economy is still weak is a negative for investors, but as long as interest rates stay low, nothing short of a nuclear disaster will matter much.

Have a good evening I'll see you tomorrow.

Sept. 18, 2013 | 2:16 AM EDT

The Fed Surprises Everyone

  • Ben Bernanke has a lot of explaining to do.

The Fed surprised the market with a decision not to cut its bond-buying program at all. It was widely expected that there would be at least minor tapering and now it is going to be interesting to hear Fed chief Ben Bernanke explain this decision.

The bears view will be that the economy is still so poor that the Fed can't even cut back quantitative easing a little, but this market loves the endless cheap money. Nothing else matters, especially economic growth.

Typically, we see some swings on the FOMC news but this surprised the market so much that we are just seeing a straight-up move so far. Again, squeezed bears and underinvested bulls are providing steady underlying support.

It isn't easy to put money to work when it moves like this but I have no interest in trying to fade this sort of strength. The bears will likely try to add pressure on the Bernanke press conference, but there is too much money looking for a place to go for that to work for long.

Sept. 18, 2013 | 10:33 AM EDT

Classic Pre-Fed Action

  • Stocks are just drifting around.

We have classic pre-Fed action this morning. Generally, you see random, short-term, speculative action in front of the FOMC announcement, and it is a mistake to read anything of significance into it. Stocks are drifting around with a few pockets of action due to traders, but the indices are flat and without strong movement. Breadth is negative with precious metals leading to the downside while biotech and solar energy lead to the upside. Apple (AAPL) is bouncing on a positive review in the Wall Street Journal and that is helping the indices.

I don't bet on the reaction to the Fed, so I'm staying focused on small-cap trades. I chased Atossa Genetics (ATOS), one of those thin biotechs that is seeing crazy momentum. Eagle Bulk Shipping (EGLE) is a shipper that should benefit from continued strength in the Baltic Dry Index. VimpelCom (VIPS), a recent Shark Technical Buy, is moving out on a recommendation. And Zhone Technologies (ZHNE), my stock of the week, is slowly pushing higher.

I'm going to keep digging for good setups but I don't plan to hold a lot of new inventory in front of the Fed.

Sept. 18, 2013 | 7:50 AM EDT

The Bulls Have an Edge

  • The market doesn't seem worried about the Fed news.

The Federal Reserve is not currently forecasting a recession. --Ben Bernanke, January 2008, shortly before the start of the Great Recession.

The bears have long anticipated that the market would struggle once the Fed became less accommodative and interest rates began to rise. The basis for this argument is based on nothing more than the old saying about not fighting the Fed. When the Fed is keeping rates low and providing liquidity, it will drive the market up and when they are doing the opposite, it will drive the market down.

While this is very simplistic thinking, it is logical. But so far, the market hasn't been overly concerned about a less-accommodative Fed. The bulls have argued that the Fed is still quite dovish and that it is premature to worry about minor tapering. With the indices hitting new highs, it is clear that the bulls have been right.

The question today is whether the FOMC interest rate announcement will produce a shift in the character of the market action. It is widely anticipated that bond buying will be cut by $5 billion to $15 billion, even though the economic recovery is still quite tepid. The bond market has been pricing this in for a while and the market seems to have already discounted it.

The bears are going to be looking for a "sell the news" reaction to the FOMC announcement, but that has not worked well lately. The market seems to keep running when highly anticipated news is announced.

Things that used to work seldom work anymore, and one of those things is a "sell the news" reaction. What seems to happen more frequently is that the bears are squeezed and the bulls are underinvested and forced to chase to add long exposure.

The market doesn't seem worried about the Fed. The indices have quickly overcome minor bouts of weakness and are on the verge of breakout moves to new multiyear highs. Not only is there little worry or concern, but some might say the action is downright complacent.

Ben Bernanke always has the capacity to surprise the market, but it is going to take something very dramatic to shake the bulls. I suspect that many bulls are rooting for a negative reaction so they can rush in and buy the dip again.

It is going to be slow going until the FOMC announcement at 2 p.m. ET, and I expect to see quick swings as the news is digested. The bulls have the edge and the Fed news is well-anticipated, but the possibility of a surprise is quite high.

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