After the gap-down open and poor action this morning, the market didn't care what the Fed had to say this afternoon. The Fed increased its tapering, as was widely anticipated, but noted the recovery remains slow and they will stay flexible.
I thought the market might be a bit relieved that things weren't bad enough for the Fed to taper its tapering, but the cutback in bond-buying isn't significant enough to really matter. At the end of the day, the Fed is going to keep working to extricate itself from quantitative easing with minimal market disruption.
What was most notable about the action today was that it wiped out Tuesday's bounce. It has been a very long time since we've had that sort of bounce attempt fail so completely. Typically, it just kept running, so this action is surprising to many and probably feels worse because it has become so rare.
In the old days, a failed bounce was exactly what you'd expect, but in the days of QE it became the exception. Now that the Fed is slowly backing off, we have a return to normal action. That may not feel so good today if you are long, but it will be very interesting from a trading standpoint.
The market has definitely changed character in 2014 and we had better be ready for that to continue.
Have a good evening. I'll see you tomorrow.
Jan. 29, 2014 | 1:35 PM EST
My Fed Call
- I expect tapering to continue and the market to rally on the news.
The FOMC interest rate decision is coming up at 2 p.m. ET and the market doesn't seem to be expecting positive news.
The issue is whether the recent economic news, particularly the jobs report, retails sales and durable goods, was bad enough to cause the Fed to hold off on additional tapering. It was widely anticipated last month that the Fed would increase tapering by $10 billion at the January meeting but we have had a steady flow of negatives since then.
The market loved endless quantitative easing but most market players seem prepared for the advent of some tapering. The market rallied sharply with the surprise tapering announcement at the last meeting, probably because it was an indication that maybe the economy really is improving a bit.
Many market players are tired of the manipulation of the central banks and are happy to see them extricate themselves. It is going to take many years to undo all the financial engineering that has been done, but at least the pace of quantitative easing is slowly.
My gut feel is that the market wants tapering to continue and it will not be happy if we don't see the additional $10 billion cut back that has been talked about. If the Fed feels things are so fragile that it can't increase tapering by such a miniscule amount, this economy must really be sick.
The Fed is actually in a good position to taper now as the soft economic news will help to keep interest rates from rising too quickly. If the Fed pushes tapering off because of signs of weakness, we really must have major problems to worry about.
I'm looking for tapering to continue and the market to rally on the news.
Jan. 29, 2014 | 10:58 AM EST
A Classic Failed Bounce
- Lousy earnings are creating a headwind.
One of the rarest events in the last few years has been a failed a bounce, but we have a classic one this morning.
Last night it looked like futures were going to blast higher, but the action steadily lost steam and the indices gapped down rather dramatically. I can't remember the last time that sort of thing happened. The irony is that it is more logical than a V-shaped move, and it is probably worse now because many people are confident that a straight-up bounce is routine.
Market breadth is poor with just 1,280 gainers to 4,000 decliners, and the indices are just drifting around waiting for news from the Fed. I'm not sure what the market is looking for in the FOMC announcement, but it is going to take something dramatic to turn this market around. Tapering or no tapering, this market is dealing with lousy earnings and that is creating a headwind.
I had to deal with a dog emergency this morning, so I haven't done much trading. I flipped some Camtek (CAMT) and I would have added Himax (HIMX) if I had seen it earlier. Solars, particularly Canadian Solar (CSIQ), one of the Four Horseman, are looking better.
I'll be looking to make moves after the Fed news is out of the way, but for now I'll just dig for ideas.
Jan. 29, 2014 | 7:40 AM EST
Is More Tapering Good or Bad?
If the Fed pulls back, it would be seen as negative.
Intelligence is the ability to take in information from the world and to find patterns in that information that allow you to organize your perceptions and understand the external world. --Brian Greene
Does the pattern we have seen so often the last few years continue or does the start of tapering by the Federal Reserve change the character of the market action? That is the big question we face this morning as we await the FOMC policy decision at 2 p.m. EST today.
Over the last few years, selloffs like the one we have seen the past week don't tend to gain momentum. Once we start to bounce, the bounces don't fail. We continue to rally straight up, usually on declining volume. These V-shaped recoveries aren't what you would normal anticipate the market to do. Normally, when the market sells off there are trapped bulls and emboldened bears who will view a bounce as a selling opportunity. In this market, however, these skeptics have been consistently crushed. Bounces simply haven't failed very often.
Is it different this time? 2014 hasn't looked much like 2013 so far. In 2013 and 2012, the market had its low point on the first day of the year and never looked back. In 2014 we have yet to see any sustained momentum in the indices. We held up for a while, but then cracked and took out some key support this past week.
We are now at the point where a low-volume bounce would typically gain further momentum. The longer we hold up, the more anxious people would become that they would miss out on a quick recovery again. In essence we would have 'climb a wall of worry' type action. Market players didn't worry about being caught in a failed bounce; they worried about missing out on a bounce that turned into a complete recovery.
This time the conditions that have supported these V-shaped don't look as favorable. First, the Fed has begun the tapering of bond buying. The central bankers and their endless liquidity have been the primary driving forces for years. That is finally changing.
Some market players believe that the Fed may taper its taper today after the poor jobs report and the soft durable goods number. But others feel that will be a negative at this point as it is more important that we have a strong recovery than more liquidity.
The question we will face this afternoon is whether more tapering is bad or good. Quite a few folks were surprised when we rallied on the first tapering announcement but the market celebrated the idea that artificial stimulus was finally being withdrawn. I suspect that if the Fed pulls back its tapering now it will be seen as a negative as it indicates that we still aren't seeing any signs of a good economic recovery.
The market rallied overnight on news that interest rates were being raised in Turkey to deal with a debt crisis. But we have given back all the gains already. That is a change in what would happen in 2013 when market players looked for reasons to keep buying rather than ways to exit.
We will see what happens on the Fed news, but this market is not acting like it did the last few years. I'm much more concerned about the chances of a failed bounce and a retest of recent lows. This market is no longer going to forgive us if we take it for granted.