Operation Twist Sparks a Selloff

 | Sep 21, 2011 | 4:24 PM EDT
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The Federal Open Market Committee announced the much-anticipated Operation Twist today and that produced some very persistent selling.

It was quite a different reaction than what we have seen on prior moves by the Fed and may indicate that market participants have lost confidence in the Fed's ability to be a positive force. The endless supply of cheap funds has obviously not done much to solve our economic woes and with the Fed running out of ammunition, the buyers weren't very interested that this time our problems would be solved.

Part of the problem today was that the technical setup didn't favor a bullish resolution. We have had a very narrow run-up on light volume and shaky news flow. We were hitting up against resistance and with the unsurprising announcement today, a sell-the-news reaction wasn't a big surprise.

The biggest problem I see is that a lot of poor action has been covered up by some recent strength in big-cap names. Financials, commodities, China names, small-caps and so on have been acting poorly for a while, and finding good charts has been nearly impossible.

The recent move up was driven almost completely by a small handful of big-cap stocks that dominated the indices and may have given a false sense of confidence to some who have not been tracking the underlying action as closely. This market has been sick for a while, and this reaction to the Fed news merely confirms it.

With the rollover action today, the market is right back in the middle of the trading range that has been in place since early August. This is the third bounce that has been turned back, and now the key is not to retest those lows around 1120 of the S&P 500. If we test those lows again, I don't believe they will hold and it is going to cause real pain.

We'll see if the bulls can make a stand in the next two days as they digest the news, but the headlines out of Europe don't help matters. The negatives don't seem to be going away and even though there aren't many bulls, we may not have priced in the worst.

Have a good evening. I'll see you tomorrow.

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