The market started the week with a good-sized upward gap on hopes of a friendly Fed later this week. It was drifting along on solid breadth when a Financial Times article hit in which the author speculated that Ben Bernanke would lay the groundwork for some tapering of bond buying later this week. That sent the market down close to flat before the author tweeted that he really had no special insight and people need to "chill out."
The message, if it wasn't already very clear, is that this market is highly sensitive to any talk about tapering. The bulls keep saying that the market is overreacting to this speculation, but the market obviously views any pullback by the Fed as an extremely significant event.
The challenge that Ben Bernanke faces later this week is to set the stage for some slowing in bond buying but to not spook the market with fears that this is the beginning of the end of quantitative easing. Nothing matters more to the market than the Fed, so it is very likely to be a very volatile situation. We had a taste of it today with the big swing late in the day.
My feeling is that the Fed is going to err on the side of dovishness and that will support the market. Dip-buying should be a workable approach in front of the big Fed announcement Wednesday.
The volatility in this market is a new development and the bears will view that as a warning sign, but I still see little benefit in fighting the Fed, especially when they are going to be very careful about causing any fear.
Have a good evening. I'll see you tomorrow.
June 17, 2013 | 1:09 PM EDT
Shifting Into Drift Mode
- There isn't much momentum to entertain the hot-money players.
We are in drift mode now as the bulls made most of their money on the overnight gap and are now treading water as we await the big Fed decision on Wednesday.
Breadth has slipped to 3-1 positive from 4-1 positive and the small-cap indices are lagging. But there is plenty of green and most of the bears are standing aside out of fear of another squeeze.
One lesson this market has taught us over and over this year is to not anticipate that moves like this are going to end in a sudden reversal. Anticipatory bearishness has been extremely costly. If you don't like the market, then the correct move is to raise cash rather than try to put on index shorts. The index shorts have consistently added insult to injury.
It is lazy intraday action that often sets us up for a good close, but there isn't much momentum to entertain the hot-money players. I'm just riding most of my longs and am not doing much new. I'll look for some additions in the final hour of trading, but for now I'm just going to stick with the longs until they give me a good reason to sell them.
June 17, 2013 | 10:30 AM EDT
Early Action Is Upbeat
- Market players are expecting Bernanke to deliver the good.
The morning action is upbeat. Market players are optimistic that Fed chief Ben Bernanke will deliver the goods Wednesday, so the machines are in buy mode and the hot money is chasing. There isn't a worry in the world.
Breadth is extremely good at better than 4:1 positive. Solar energy and biotechnology are leading again while precious metals are the laggard. Google (GOOG), Netflix (NFLX) and a number of the big-cap names are plugging along, but the action in select small-caps is the most impressive.
Breadth on my small-cap screens is better than 10:1 positive. Some of the names I've mentioned lately that are doing well include Canadian Solar (CSIQ), L&L Energy (LLEN), Albany Molecular Research (AMRI), Immersion (IMMR), Ambarella (AMBA), YY Inc. (YY), Renewable Energy (REGI) and ValueVision (VVTV).
CSIQ is one I'm definitely looking to add to over time; it has price target of $25 from Nomura and there is talk of earnings power as much as $4 in a few years. Technically, the stock is attempting to break out above $10 on very good early volume.
June 17, 2013 | 8:34 AM EDT
The Fed, Always the Fed
- Will the central bank set aside growing worries about tapering?
The job of the Central Bank is to worry. --Alice Rivlin
After very choppy action last week, the big issue is whether the Fed's interest rate announcement Wednesday will put a bid back under the market.
The action has been chaotic recently, primarily due to worries that the Fed is going to start tapering off its bond-buying. Although a major reversal in policy is far off, any hint that the Fed may start to back off will spook the market. We have ridden on the Fed's coattails for years and it is frightening for many market players to think we could lose this support.
There is still plenty of economic weakness and uncertainty, which the Fed will address, but the spike in interest rates and the wild swings in the Japanese market are causing growing concerns that central bankers are losing some control.
The Fed has already sent one hint through the Wall Street Journal that it is premature to worry about a less accommodative Fed, but after a big day on Thursday, the inability to follow through Friday illustrated that market players are still not confident. The market anticipates more dovish Fed comments this week, which is why it is gapping up.
The issue this week will be whether the Fed can set aside growing worries about tapering. They obviously are inclined to broadcast a dovish message, but the market knows that can't last forever, so the action is more volatile.
Technically, the market looked like it found technical support at the 50-day simple moving average and was ready for another V-shaped bounce, but the big move Thursday did not see the typical follow-through on Friday. Every other time it bounced after a pullback this year it has gone straight back up, so this was a change in behavior.
The good news is that it did hold key support and has established a trading range. As long as it stays above recent lows, the bulls are going to provide support, especially if the Fed throws a bone with more dovish comments.
What it really boils down to this week is how well the Fed convinces the market that it will continue to be accommodative. Everyone knows the Fed is going to start hinting about tapering well in advance to prevent any big future shock, but the Fed seems unhappy with how much the market is already reacting to hints.
The first rule of this market for a long time has been "Don't fight the Fed." I believe that will continue to be the theme, but volatility is going to pick up as uncertainty creeps in. The best defense will be good stock-picking, and that is what I'm going to focus on.