Pushing, Shoving Ahead of Fed

 | Sep 19, 2011 | 9:08 AM EDT
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"Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services." --Henry Ford

After rallying for five-straight days on news that Greece was saved once again we are gapping down to start the new week on news that maybe it isn't.

The straight-up move last week caught many market players by surprise primarily because the news simply wasn't anything special. All we had were some comments about the determination of European leaders to solve the ongoing sovereign debt problems. Nothing specific was done or even proposed, but market players were too negative and that set up the conditions for a sharp rally.

Last week's strength had far more to do with market dynamics than it did with the news flow. The combination of too much bearishness, oversold technical conditions and aggressive high-frequency trading is what helped to create the move.  Fundamentals didn't change in any significant once. Once the move started, it fed on itself as market players tried to reposition and catch some of the momentum and the machines accentuated the moves. The more we rallied the more the underlying buying pressure increased.

Since the market lows in March 2009 we have seen more and more of this type of action. The crash of 2008 and early 2009 changed the way the market operates.  Many individual investors simply gave up and computerized trading has grabbed a bigger and bigger share of the daily volume.

Another structure change has been near zero interest rates and the flood of cheap money. The institutions that have benefited from this cash have created a number of strategies to deploy it into equities and that has caused unusual market action quite often as well.

The challenge of this sort of action is that psychology, fundamentals and good, old-fashioned stock picking don't matter too much. What matters most is the momentum that is created by the machines and it tends to be far more persistent than many folks anticipate. All we can do is recognize that this phenomena exits and try to find ways to navigate it.

Despite the big move last week we had more new lows than new highs on Friday, little leadership other than a few big caps like Amazon.com (AMZN) and Apple (AAPL) and very little aggressive speculation by hot money traders.  Obviously someone was buying, but it was very tough to find many individual traders who were excited about the action.

Things are not likely to be much easier this week as we have a very important two-day meeting of the FOMC. They will release their policy decision on Wednesday afternoon and it is widely anticipated that will enact what is know as Operation Twist.  Operation Twist is designed to move the yield curve to produce lower longer term interest rates.

Some of the strength last week was probably anticipation of the Fed move, but there is still some uncertainty about whether they are ready to launch this move at this time. The bottom line is that we are going to see a big move on the Fed news Wednesday, so there will be a lot of pushing and shoving the next couple days as positioning takes place.

Unfortunately this market is just very tricky. We are now technically overbought and at resistance, but the action last week created a lot of anxious bulls who are underinvested and looking for dips. But with the Fed on deck, risk is extremely high and it is not going to be easy to be overly aggressive unless you are very quick and playing things tight.

Monday-morning gap downs usually invite dip buying. The key to the action will be staying above the early lows. If we bounce and then roll over quickly the downside momentum could build but if we hold then the frustrated dip buyers are gong to try to find some exposure.

Buckle up its going to be a bumpy ride.

Columnist Conversations

I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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