Typically, we see some wild swings in the market following the Fed interest rate announcement, but today the action was all one-way. While market players were counting on the removal of the language about being patient, what they didn't anticipate was how emphatically the Fed would state that it still is in no hurry. The removal of the "patient" language was more stylistic than substantive.
What really caught market players by surprise was the focus on a number of negatives. The economy is still slow and GDP predictions were reduced. While employment has been better, there is still room for improvement, and, most importantly, there are still some concerns about deflation.
Overall, it was much more dovish than was anticipated, and that is why the indices went straight up with just a little give-back into the close. Every sector was green, the dollar was slammed and breadth was closing in on 3-to-1 positive. There was a mad scramble to add exposure by folks who were a bit worried that removal of the "patient" language might mean the Fed was more hawkish.
Here we are once again, right back where we have been so many times. The Fed is dovish, stocks are flying and we have a big supply of underinvested bulls who need to find entry points. It has been the recipe for V-shaped moves in the past, and we can't count out another one given these conditions.
The most important words of advice in this market remain, "Don't fight the Fed."
Have a good evening. I'll see you tomorrow.
March 18, 2015 | 2:33 PM EDT
Fed's Patience Is Gone
- · Boy, this market loves to love the Fed.
As expected, the Fed has removed the reference to being "patient" from its latest policy statement, which some might assume is a negative. But the central bank has softened the blow by lowering growth forecasts and sounding rather dour about the U.S. economic situation. In other words, Bad news is good, and the market is spiking as the focus on the word "patience" is now forgotten.
The Fed has been masterful at giving the market what it wants, and it is doing it again. There was concern that tone of the policy statement would be more hawkish with "patience" being left out, but the comments about economic activity moderating and the cut in GDP forecasts more than offset any worries that rates will rise soon. In addition, the Fed is still worried a bit about deflation, and that will really help prevent any rate hikes.
The market moved straight up on the Fed news, which is a bit rare. Usually we see a few swings, but this was a surprisingly dovish statement. The removal of "patience" has been rendered irrelevant by the focus on the tepid economic recovery and low inflation.
Chair Janet Yellen's press conference is next, but she is unlikely to say or do anything that sours the mood. As I said this morning, the market loves to love the Fed, and they are making it easy to do so.
March 18, 2015 | 10:40 AM EDT
Aggressiveness Lacking Ahead of Fed
- There's little advantage in trying to get in front of the news.
The pattern of a weak open followed by quick dip buying continues. The market is still running red on negative breadth of 2,100 to 3,000, but there is underlying support and no rush for the exits. iShares 20+ Year Treasury Bond (TLT) is up again as market players don't seem very worried about a quick rise in interest rates.
We don't have any notable sector leadership today as biotechnology, retail and oil lag while drugs and solar energy show a little relative strength. Small-caps are also outperforming once again, but the momentum screens are lackluster and there isn't much standout strength.
With the Fed news pending it is pretty typical trading. Traders are doing some quick flips and repositioning but not many aggressive moves. There simply isn't much edge in trying to get in front of the Fed.
I'm looking at a few solar names. JA Solar (JASO) was my overnight technical buy and JinkoSolar (JKS) is of interest. I'm still holding SunEdison (SUNE). Chegg (CHGG) is very thin, but that continues to set up well. However, I'm not going to do much until we have the Fed out of the way.
Mar. 18, 2015 | 7:20 AM EDT
The Market Loves to Love the Fed
- Will this time be any different?
"It's been a long, a long time coming
But I know a change gonna come, oh yes it will."
--A Change is Gonna Come by Sam Cooke
For over five years, the Fed has been the driving force behind one of the most consistent bull markets in history. Never has the old saying "don't fight the Fed" been more true. The market has loved the cheap cash created by quantitative easing, and the ongoing economic struggles have been rendered irrelevant.
At 2 pm ET today, we will find out if the Fed is preparing the groundwork for the first interest rate hike since August 2006. The focus is the single word "patient". If the Fed drops this word, then some market participants will be looking for an initial rate hike as soon as June.
While it is highly anticipated that this change in the policy language will be made, the market has been acting quite concerned so far. There have been worries about a more hawkish Fed previously, and Janet Yellen has quickly calmed the market with assurances that the Fed is "data-dependent" and would be in no rush to raise rates, especially since inflation readings have remained low.
The bulls point to various signs of economic weakness, low oil prices and the headwinds created by the strong dollar, and are reassured that the Fed isn't going to do anything too bold or aggressive. The Fed has seemed very concerned about market reaction to increased hawkishness, so there is good reason to expect them to remain very incremental.
The problem is that there has been some improvement in the jobs market. Unquestionably, there are still some major problems, but the Fed will lose credibility if it doesn't acknowledge that there is enough improvement to start the process of unwinding QE.
For years now, the bears have been anticipating that a more hawkish Fed would be the catalyst for a market top. Not only have they been wrong, but they have been spectacularly wrong. One thing that the pessimists have underestimated was that the ECB, Bank of China and many other central banks around the world would start their own QE programs. The cheap capital keeps on flowing internationally, so it hasn't mattered as much that the Fed is slowly losing its dovishness.
The million dollar question today is whether the Fed announcement is going to be the catalyst for a market selloff. It is already well anticipated that the word "patient" will be dropped, but will the context of the policy statement suggest that a rate hike will commence as early as June or September?
The market has been surprisingly unconcerned over the past week, which makes sense since we so seldom see a negative reaction to the Fed. Betting on a "sell the news" reaction hasn't worked in years. The market loves to love the Fed. Will it be different this time?
Early market action is slightly negative. Oil drops to a six year low, and overseas markets are mixed.
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