Taken by Surprise

 | Dec 18, 2013 | 4:15 PM EST
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The market action surprised many market players in more than one way this afternoon.

First, the majority of traders did not expect the Fed to announce tapering today. It was only a minor move, but most thought the Fed would wait at least another month.

The second surprise was that many thought the market would have a strong negative reaction to a tapering announcement. That definitely was not the case as the indices blasted higher on the news. The conventional wisdom proved wrong on both counts.

That none of the typical whipsaws emerged on the Fed announcement was a clear indication that the news was a surprise. The indices typically jump around a bit, but this time it was straight up on a mad scramble to put money to work.

The bears will tell us that volume wasn't impressive and this was a knee-jerk reaction that won't last. But with the peak of positive seasonality here, the end of the year fast approaching and Fed uncertainty shoved aside, conditions are good for further upside.

We'll see how the news is digested overnight, but there is a sense of relief that the Fed is starting to do what many believe it should have done already. Now if we can see more energy in individual stocks, we will be in good shape to wrap up the year.

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

Dec. 18, 2013 | 2:16 PM EST

Free to Trade

  • Now that the Fed is out of the way.

The Fed surprised the market with the decision to taper its bond-buying program. The consensus prediction was that the central bank would wait, but there was a substantial faction predicting minor tapering and that is what we got today.

So far, we are seeing a very favorable market response, which is probably due to remove some uncertainty. At least we won't have the "will they or won't they" taper debate for another month.

Bulls on the sidelines are jumping in out of fear that the end-of-year rally is on and the market may run away from them. So far, there haven't been any of the typical whipsaws, which is probably a function of surprising the market.

I'm looking to put money to work and I feel good about the chances of more upside into the end of the year. The Fed has been the main roadblock, and now that it is out of the way, we are free to trade.

Dec. 18, 2013 | 10:24 AM EST

Just Managing Positions

  • Until the Fed news is out, there isn't much to do.

The indices are up slightly but there is plenty of nervousness this morning as we await the Fed announcement. Apple (AAPL) is hurting the Nasdaq and both Facebook (FB) and Twitter (TWR) have lost their luster after leading for a few days. Small-caps are full of landmines and an awful lot of quick reversals can trap you if you pick the wrong stocks.

Most market players don't expect the Fed to make any major moves today, and plenty of folks think it will be a buy-the-bad-news scenario even if tapering is announced since it is so anticipated.

In the bigger scheme of things, if the Fed tapers bond purchases to $75 billion from $85 billion it is not significant, but the change in direction rather than the magnitude is an issue. Tapering will only lead to more tapering.

I don't expect the Fed to do anything significant, which would lead to relief buying. Unfortunately, the tapering debate would continue for another month.

I'm not doing much other than managing positions. I made two buys this morning, InterCloud Systems (ICLD) and Arrowhead Research (ARWR), but these are short-term trades that won't last long. Until the Fed news is out, there isn't much to do.

Dec. 18, 2013 | 7:33 AM EST

Definitely Some Nervousness Today

  • Remember the old adage: Don't fight the Fed.

I care about Wall Street for one reason and one reason only because what happens on Wall Street matters to Main Street. --Ben Bernanke

The market has been worrying for months about when the Federal Reserve would finally begin to taper its bond buying program. Everyone knows that tapering is coming but the big issue has been the ultimate timing. Concern over this issue has increased lately as better-than-expected employment news, GDP numbers, political pressure and the action in the bond market signal that the Fed can't hold off for much longer.

Is today the day? Do we see the big tapering announcement this afternoon? The market has been acting poorly for a couple weeks now and the press has been chalked it up to 'tapering fears'. So maybe the market knows something. Most economic commentators, however, don't expect the Fed to make its tapering move today. But there is concern that they might set the stage for the tapering announcement in the next month or two.

The big question for market players is to what degree is tapering already anticipated and priced in? We have been talking about it for many months and it is a certainty to eventually occur. But how well will the market handle the news when it eventually hits?

The bears believe that tapering is going to be a game changer. It was the Fed and its bond buying programing that drove this market up the last few years. It is logical to assume that when it is slowly withdraws its support the market is going to start falling apart as well.

The bulls argue that we shouldn't confuse 'tapering' with a reversal of quantitative easing. The Fed is going to continue to buy bonds for a long time to come. They may not buy as many in the future but they are going to still provide plenty of support and will keep the pressure on interest rates.

Tapering is certainly well anticipated so it won't be a complete shock when it does finally occur. But there is one simple adage that has worked in this market for a very long time and that is 'don't fight the Fed'. When the Fed starts to pullback we are going to lose a very important dynamic and we'll need to watch the price action very closely. It will have a psychological impact on the market, but whether it is the end of the uptrend isn't something I'm going to try to predict.

The more immediate question for us to ponder is whether the Fed decision will clear the way for the much anticipated year-end rally? Assuming we don't have a tapering announcement. are the buyers going to step up and get things moving as seasonality suggests? There is probably a pretty good chance of that but there is definitely going to be some nervousness today.

The good news for the bulls is that the choppy action of the last few weeks has given us a pretty good setup for a run back to the recent highs. We've worked off the frothiness that built up in November and plenty of stocks have come back to support levels. There is still some chasing, but it is much more limited that it was.

Market action is going to be slow until the Fed announcement at 2 p.m. EST, and then we should see some fireworks. Any talk about tapering in the policy statement is going to cause some panic but I suspect there will be dip buyers looking to take advantage should that occur. It is hoped that we'll remove the Fed overhang and be able to focus on some 'holiday trading' to wrap up the year.

We have a slight positive bias to start the day but it is going to be slow going until this afternoon.

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