The interest rate announcement from the Fed held no surprises, but in the current market that is apparently good reason to keep on buying. The bears were hoping for some sort of sell-the-news reaction and were caught wrong-footed again. They ended up providing additional upside as they were squeezed into the close. Usually we have a little volatility on the Fed announcement, but this time it was basically straight up after some momentary hesitation.
The bears will be shaking their heads and telling us that the lack of fear in this market is a major warning sign. Of course, they have been saying that for a while, and they are hard pressed to come up with good complaints when the market totally ignores them.
I've been bullish lately and staying with the trend, but the persistence of the buying on the Fed news surprised me. There really was nothing at all surprising from Chair Janet Yellen, but it really didn't matter. The only thing she said that could be spun as "bullish" was that the stock market is not acting outside historic norms.
Probably the best way to explain this market is that it is driven by momentum and not logic. If you spend too much time dwelling on what can go wrong, it is easy to underestimate the power of momentum. Yes, there many good reasons why the market can't continue to act in this manner, but they don't matter when we have momentum like this.
Have a good evening. I'll see you tomorrow.
June 18, 2014 | 2:15 PM EDT
No Surprises Here
- Only the bears come away from the FOMC decision disappointed.
The FOMC interest rate decision was exactly what has been widely anticipated: Bond-buying is tapered by another $10 billion a month to $35 billion and interest rates will stay low for a "considerable period of time." Staying highly accommodative for an extended period is what the market wants and we are seeing a positive reaction to the unsurprising news so far.
The bears had been hoping that this routine decision would produce a sell-the-news reaction, but that hasn't been the way the market has operated in the last few years. Any reassurance that the Fed will keep rates low brings in buyers even when it is already obvious.
Usually, we see a few swings following the decision, and we are already starting to fade. The decision is nothing more than an excuse for traders to make moves. They will use the news to justify their decisions, but there isn't any fundamental change, really.
Janet Yellen's press conference is coming up and that may provide additional excuses for a little buying and selling. Nothing has changed, but traders will trade and we will have some mostly random action.
June 18, 2014 | 10:35 AM EDT
Typical Pre-Fed Trading
- It's going to be slow and choppy trading until the announcement.
We have typical pre-Fed trading this morning. The indices are close to flat and breadth is just about even. There is mild profit-taking in names like Tesla (TSLA), SunPower (SPWR), SolarCity (SCTY) and VASCO (VDSI) after good moves, but it looks like prudent money management in front of a news event.
There are folks who think the Fed will be a nonevent because the central bank won't do anything surprising. What they are missing is that many traders see it as a catalyst, regardless. They are going to react to the news no matter what it is and that is why we always have these swings when the news hits. In fact, there is more likely to be more swings when nothing much is expected.
I've cut back some positions this morning to protect recent gains, and I don't see a whole lot to do right now. There are minor names on my radar, such as Synergy Resources (SYRG) and SuperCom (SPCB), but it is going to be slow and choppy trading until this afternoon, so there is no rush to do anything other than to try to scalp a few pennies.
There is a lot of chatter lately about the fact that the S&P 500 hasn't had a move of greater than 1% in quite a while. It wouldn't hurt if the Fed is the catalyst that ramps up volatility. We could use a good shake to set up more opportunities.
June 18, 2014 | 7:42 AM EDT
Don't Expect Fireworks Today
- The Fed announcement is unlikely to produce a market top.
"The job of the central bank is to worry." --Alice Rivlin
After a three-day run, and given that the market has finished higher for 15 out of the past 19 sessions, the big question today is whether the Federal Reserve interest-rate decision will be the catalyst that puts an end to this uptrend in the indices. We have seen similar setups of late, and typically the market has held up well, even when it has been technically extended and set up for a "sell-the-news" reaction.
The problem the bears tend to face in this situation is that a sell-the-news reaction would almost be too obvious. There is no question that the Fed will, at some point, become more aggressive at raising interest rates. The market will not like that -- but the bears have been anticipating that for years now to no avail.
What continues to save the market from the Fed is that the economic recovery still stinks. There has been some minor improvement lately, but problems in Europe and China help keep the Fed on hold. The bears were excited about some mild signs of inflation in Tuesday's consumer price index, but there is still little to push the Fed to aggressively unwind its monetary accommodation.
The biggest danger right now isn't that the Fed might do something surprising today. The central bank is likely to continue with the stimulus-tapering program it has announced, and is bound to make some comments about how rates will remain low for quite some time, even though there are some signs of economic improvement.
The danger today is that nervous bulls will use the event to lock in a profit regardless of the actual news. That is what the bears are hoping for, but typically the selling pressure has not lasted for long. There remains a big supply of underinvested bulls, and these folks turn into dip buyers very quickly when there is market weakness. In each of the last three days, we saw some minor weakness in the morning.
Some skittishness is likely for today, and some of the shorter-term players will be inclined to take a profit, but the Fed rate announcement is unlikely produce a market top. In fact, the danger of a short squeeze is quite high should the bears be too aggressive in acting on their hopes.
That said, I don't want to sound too sanguine about the potential of volatility from the Fed news. The market has had a good run, and it is very important for us to not give back recent profits. We need to manage trades carefully and be ready to take some defensive action should the price action shift.
Look for slow trading until the Fed news hits at 2 p.m. EDT. We should see some fast swings after that as market players try to guess what happens next. One thing to keep in mind is that the central bankers seldom disappoint the market.