Apparently, no one is particularly worried about holding positions into the FOMC interest rate decision tomorrow. The S&P 500 has ramped up over 2% in front of the news and closed near the highs of the day. Breadth was very strong and the action was strong enough to be V-like.
In recent years, the market has tended to have a positive reaction to FOMC interest rate decisions, so it is understandable that some folks would try to stay in front of the action, but this time there is more uncertainty than ever about how things might unfold.
Because of the very high level of uncertainty about both what the Fed might do and what the market wants, it is likely we will see some heavy volatility. What would probably be the most surprising would be a straight-up move, but that is what this market action seems to be suggesting.
I sold down quite a bit today because I feel no edge and because we have become a bit extended after this move. I feel comfortable that I will have the chance to reload following the decision when risk is no longer as high.
This is one of the most significant FOMC decisions we have had in a while and it is going to be very interesting to see how it develops. The strong market action in front of the news only makes it more complicated.
Have a good evening. I'll see you tomorrow.
Sept. 16, 2015 | 1:38 PM EDT
What, the Market Worry?
- · Today's positive action is probably computer-driven.
From the market action today and yesterday, you sure wouldn't know there is any worry or concern about the possibility that the Fed might hike interest rates tomorrow. Some folks chalk up the action to anticipation of a favorable response to the Fed. Given that we don't know what the Fed will do or what the market wants, it is unlikely that is the driving force behind this positive action.
What is likely driving the recent strength are computer algorithms and high-frequency trading programs that are exploiting the reluctance of many traders to jump in front of the Fed. They are pushing up stocks and extracting profits as they push the market to move in a way that few expected. These programs are short-term and aren't going to be around for the news event tomorrow. They will move to the sidelines before the news hits, but at the moment they are doing a nice job of making things look pretty good.
This sort of run into a very uncertain Fed decision would seem to be a perfect setup for a "sell the news" reaction, but that is less so when the action is being driven by computers rather than expectations. Selling the news has not worked well in recent years mainly because of the corrupt influence of the computers. Normal human emotions just don't apply like they did before.
As I mentioned this morning, I've been a heavy net seller today and I continue to lift my cash levels. It is possible that the market will run away to the upside from here, but I think it is highly unlikely that we don't have a good bout of volatility as we digest the Fed decision. I'm looking to be a buyer, but I'm waiting for some new setups to develop first. Right now I see no edge at all in chasing this market higher.
Sept. 16, 2015 | 10:24 AM EDT
My Game Plan: Hold on to Recent Gains
- · In a market that can now go down, selling is a strategic advantage.
Breadth is positive and the indices are up slightly but I'm seeing profit-taking under the surface. The rally yesterday was a gift to the longs and today's positive open was a good opportunity to lock in gains. Precious metals and oil are leading, and biotech and chips are lagging. That is a sign of a shift in speculative interest. Momentum stocks are also showing relative weakness.
I've been a heavy net seller this morning with just one minor buy of TransAct Technologies (TACT). The small biotechs have done very well lately and I'm cutting a number of them and will be looking for re-entry. Trevena (TRVN), my Stock of the Week, for example, has delivered the goods and I've now sold down about 80% of my position. I still think it can go higher but I want to lock in the gains and look for new entry points. I see no reason to risk the Fed news tomorrow.
My game plan is to do my best to hold on to recent gains. There is no other way to do that but make some sales and raise my cash level. We actually have a market that goes down at times now rather than the endless V-shaped moves. Selling is a strategic advantage now and it is good time to take advantage of it if you have gains to protect.
The Fed announcement is tomorrow and it is going to be a bumpy ride. If you are looking for straight-up moves from here, you will likely be disappointed.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider TACT to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Sept. 16, 2015 | 7:16 AM EDT
Why Would You Trust the Rally?
- Investors can't even agree if it's good or bad if the Fed hikes rates.
"I wish I had an answer to that, because I'm tired of answering that question."
We still have another day to wait before the monumental FOMC interest rate decision, but market players are growing impatient and buying anyway. The positive action on Tuesday was attributed to anticipation of the Fed decision, but market players don't even know if it is better that the Fed keep rate hikes on hold or go ahead and get it over with.
The rally Tuesday really didn't have a reason. Market players were just tired of waiting and wanted to do something, so they decided to by. The more they bought, the more it sucked in other buyers who worried they were missing out on something significant and wanted to join the party.
While the action helped to restore some optimism and had the bulls ready to declare that the worst is over, it really didn't change the big picture at all. We are still in a very wide trading range and we haven't had enough time to build strong bases in individual stocks. The overall market is still struggling to return to an uptrend and stock picking is challenging.
The big problem now is that the market is edgeless. Anyone that tells you that they know what the Fed will do or how the market will react is deluded. Not only are the chances of a rate hike 50-50, but market players can't even agree whether it is better to have a hike now or later. The conditions are very good for a high level of volatility following the decision, so why in the world would we trust a rally into the news?
I don't mean to sound pessimistic. There has been some good trading. The small biotechnology names in particular have offered great opportunities. I've been quite pleased with the way a number of recent stock picks have been acting, but that doesn't mean we should trust the overall market.
At the moment, we are in one of those environments where the direction of the indices is very unclear, but there is good trading under the surface if you have the right timeframe, manage trades carefully and are selective with your picks. Although the Fed is keeping things very uncertain, traders are anxious to make money and that is giving us some decent action to trade.
At this point, it seems highly unlikely that the market is going to keep rallying into tomorrow's Fed decision. Those that caught some upside are likely looking to protect gains and should be a bit hesitant about rolling the dice on the Fed. The machines are going to push us around and the chances we see a pullback before the news is high.
The positive spin is that the market loves to love the Fed. We generally have positive reaction to Fed decisions and there are traders that are anticipating that to happen again. They are going to try to stay in front of the news and that will hold us up, but the risk is very high and it is more of a gamble this time than usual.
China bounced back overnight, which is helping the mood, but indications are flat in the early going. The name of the game will be protecting some recent gains and that is going to be very tricky.