The European Central Bank did a masterful job of managing expectations, which helped to produce yet another V-shaped move in the U.S. market.
The stage was set for an announcement of monthly buying of 50 billion euros' worth of bonds for two years after a news leak to The Wall Street Journal, but this morning ECB chief Mario Draghi upped the ante and raised the buying to 60 billion euros for as long as inflation is under control.
Initially we had a very strong reflexive "sell the news" reaction, but traders had been betting too aggressively on the reverse, which caused a massive squeeze after a brief visit to negative territory. The action was straight up the rest of the day as more and more pundits declared how positive this move was by the ECB.
Quite a few traders thought that this pattern of action was over, but they were proven spectacularly wrong. It was classic V-shaped action, which caused great frustration for underinvested bulls and crushed the bears, who were looking for the big reversal. This type of action has doomed many funds to underperformance the last two year, and it has likely left them lagging again.
Can the market keep on running? Absolutely. It is easy to find reasons why it shouldn't, but it simply hasn't paid to bet against this pattern of action. It may not be easy to put cash to work, but betting against this market is even worse.
The moral of the story is never underestimate the power of central bankers.
Have a good evening. I'll see you tomorrow.
Jan. 22, 2015 | 1:13 PM EST
It All Depends on the Close
- Today's market swings have been very confusing.
The big swings in the market today are confounding many traders who are struggling to figure out whether we have a "sell the ECB news" setup or V-shaped bounce action driven by our friendly European central bankers.
Typically, central banker action like we have today has resulted in some fast and furious upside, even when it is highly anticipated. On the other hand, this market has been undergoing a change in character since the last couple days of December, and you have to wonder if maybe quantitative easing is losing some of its magic.
My approach isn't to try guess how this will play out, but to wait for clear signals and then react quickly. Right now it boils down to the close. If the market holds and there is a push into the close, there is a good shot at some sustained momentum. If we weaken as the day winds down, then that will indicate that maybe "the sell the news" trade is going to exert itself again.
The dip and fast reversal this morning was a function of too many traders being too quick to anticipate the "sell the news" trade. They may be right about it ultimately, but they hit the upside gap too fast and were squeezed when things reversed.
My gut feeling is that it isn't going to be nearly as easy to generate a V-move this time -- but one of the key elements of those moves is that they tend to surprise you. The fact that it feels unlikely is one of things that keep causing them.
We'll just have to wait a couple hours and see how this market looks into the finish.
Jan. 22, 2015| 10:28 AM EDT
Bouncing Around After ECB News
- It's going to be the close today that seals the deal.
The sell-the-news-trade was just too obvious to resist, but we are bouncing back rather strongly after a dip into the red. The big issue now is whether the buyers are going to continue to provide support or will they look to flip into strength?
My confidence level in the upside is pretty low, but it is going to be the close that seals the deal. If the buyers are not showing interest late in the day, this market is going to be very dangerous. A strong finish is going to confound the bears and cause some chasing by the underinvested bulls. It is going to be extremely interesting to see how this develops as the day progresses.
I've been a net seller so far. The biotechnology sector is looking quite precarious, which is robbing us of some good leadership. Dan Rosenblum of Shark Biotechnology notes that there have been more than $1.2 billion in secondary offerings in the sector over the last two days, which is a very worrisome sign.
Outside of biotechnology the best group, I see is semiconductors. Tower Semiconductor (TSEM) continues to be my largest position and I like the way the chart of Inphi (IPHI) is developing. Interestingly, some of the big-cap technology names like Alibaba (BABA), Facebook (FB) and Google (GOOGL) have been exhibiting relative strength lately, which may signal a move to safety.
It is extremely tough to be aggressive with trades right now, but we'll see where we close and go from there.
January 22, 2014 | 09:00 AM ET
Market Reaction to ECB Critical
- If there's a sell-the-news reaction, a V-shaped bounce looks unlikely..
"Within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." -- Mario Draghi, European Central Bank President, July 25, 2012
The ECB has been promising aggressive action for years and this morning it is finally implementing a quantitative easing program.
The ECB announced bond buying of 60 billion euros per month, which is 10 billion more than as indicated yesterday. In addition, it is leaving the time period for this program open and will continue to buy bonds until a "sustained adjustment" in the path of inflation.
There are a number of other details, but the market reaction so far is quite positive. The key is that the ECB is offering a bit of a surprise with the high level of bond buying and the open-ended timeframe. That was not fully anticipated.
The big question now is whether this is going to drive the market higher in a sustained manner or are we going to see a sell-the-news reaction. The announcement of quantitative easing by the Federal Reserve caused a massive rally, but that wasn't not well anticipated and was new and different at the time. The ECB is far behind the curve and is obviously reacting out of desperation to some degree. This announcement is extremely well anticipated and the sentiment has been that the ECB better go big or there is going to be a negative reaction. So far it looks like they are doing enough to satisfy the market.
A sell-the-news reaction is a very basic market reaction. When an event is well anticipated the market prices it in, so when the actual even occurs there is an inclination toward profit-taking rather than more buying. The ECB has been signaling its QE program for so long it is absolutely no surprise to the market and therefore may be already priced into a great degree.
While a sell-the-news reaction seems quite logical, it doesn't always work that way. We have consistently seen the market run on very highly anticipated and expected moves by the Fed. Even when Fed has done what everyone knew it would do, we have still seen the buyers chase the market higher. This has likely been caused by the same dynamics that have caused the tendency toward V-shaped moves and highly aggressive dip buying. Too many market players were underinvested and afraid of missing out on upside. So, they never allow much of a sell-the-news dip to occur.
The problem now is that market conditions have been shifting since the last couple days of 2014. The character of the market is shifting and we aren't seeing the same inclination toward V-shaped bounces and dip buying. Some market players are concerned that the market is forming a major top right now and that ECB may be the event that pushes us over the edge.
This is going to be an extremely important day of trading. If we can hold on to these gains, the stage is set for another V-shaped move. But if we reverse hard intraday and close poorly it is going to cause quite a bit of concern and convince many market players that the market is undergoing an major change in character.
Right now we are set for a big gap up open, but it is going to take a very high level of optimism to chase it, especially since the market has been acting so poorly lately.
