In retrospect, it isn't too surprising that weakness in the Asia economy combined with low inflation kept the Fed on hold. What confused the market was the parade of recent Fed members making hawkish comments. In the effort to provide more transparency, all they ended up doing was creating more uncertainty.
To confuse matters even more, many market players believed that no rate hike would be a market positive. We have the dovish Fed for so many years, why should today be any different? It was different because it is just downright pitiful that we still have an economy that is so weak we can't even handle a token rate hike.
In addition, the Fed lost some credibility today. It has done an extremely poor job guiding the market and has raised even more questions about the effectiveness of its policies. It was a rough day for Janet Yellen and her crew, and we are going to go through the same thing again in another month.
So where does the market go from here? The market was set up for a "sell the news" reaction and after a little jig, which is what we got. Will the bears gain some downside traction now? Technically, the indices are in position to pull back deeper and the poor close today was not a good sign. Overall, we didn't have any major selling but the sharp reversal and weak finish suggest that some folks are looking to protect recent gains. I took an index short and I'll be looking to press that a bit.
For a long time this market has been very kind to bulls that have chased straight-up moves, but that has changed recently. We aren't seeing the easy recoveries we used to and that means we need to adjust and play the opportunities in the chop. It is easier when you can just buy and let things run but we need to adapt and, right now, that means being much more skeptical of strength.
Have a good evening. I'll see you tomorrow.
Sept. 17, 2015 | 2:19 PM EDT
The Fed Makes the Market Wait ... Again
- We'll just have to go through this misery again in another month.
The Fed keeps interest rates unchanged. The key sentence in the policy statement is "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."
In addition, there is this comment: "The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely."
It appears that the central bank is concerned about "developments abroad" and kept the tone dovish, but the market isn't too happy about that. Many market players were hoping that we'd move past this debate for at least a little, while but now we will have to go through this misery again in another month.
The market has ripe for a "sell the news" reaction after the recent selloff, but I am looking for support to kick in fast. There are buyers that didn't want to jump in front of news events and now they will be hunting for entry points as we find support.
I'm looking for buys into this weakness but I will move slowly. The market wanted a hike and it is going to take a little while to digest this disappointment.
Sept. 17, 2015 | 10:41 AM EDT
Watch Out for the Rise of the Machines on Fed Day
- Computers and HFTs could dominate the action and create squeezes, today.
Although many traders are in 'hand-sitting' mode as they await the Fed's rate-hike announcement, the overall tone of action continues to be quite positive. Breadth is running around 2900 gainers to 2300 losers, and we have homebuilders and biotechnology leading, while chipmakers lag.
The S&P 500 is trading up over 2% into the Fed decision, which would seem to set up a 'sell the news' reaction, but market dynamics have shifted in recent years and that logical pattern has not worked very well. The idea that we fully price in an event as we anticipate it -- and therefore have no further buying power -- makes sense, but these days the computers and high-frequency traders seem to run counter to that thinking. Rather than 'sell the news' they will push harder and create squeezes.
Betting on a 'sell the news' reaction might be the logical human trade, but betting on a 'buy the news' response is the logical machine trade. We shall see which side dominates soon enough.
I'm doing very little, so far. My biotechnology names, like Inotek Pharmaceuticals (ITEK), Lexicon Pharmaceuticals (LXRX) and Trevena (TRVN), are still doing well. Ixia (XXIA) is slowly developing, Google (GOOGL) continues to find buyers. I'm a bit surprised that there isn't some profit taking, but that might occur as we move closer to 2 p.m. ET.
The bulls are looking very content, right now, which is good news for the contrarians -- but it is the machines that react to the news that will be the main driving force.
Sep. 17, 2015 | 07:29 AM EDT
Here's My Game Plan for Fed Announcement Day
-- The Fed's dynamic is finally shifting.
"The Federal Reserve cannot solve all the economy's problems on its own."
It is Fed Day and seldom has there been more focus on the announcement than there is today. There isn't any big secret why this decision is generating so much talk. The last time the FOMC raised rates was way back in June 2006, and we are finally on the cusp of more hawkish Fed. For years this market has been driven by the old adage of not fighting the Fed, as central bankers supplied an endless ocean of cheap capital, and now that dynamic is finally shifting.
What is also adding to the intense focus on the decision today is that the market doesn't seem to have a clue about what the Fed is going to do. Half the market believes the Fed is desperate to hike rates so that they can proclaim that all their efforts over the years have worked and it is now time to declare "mission accomplished" by raising rates. Janet Yellen and her crew have been telling us for a while that the economy is hitting many of their targets and now is the time to prove they mean it by actually hiking rates.
The other half of the market believes that there is no way the Fed can raise rates right now. First, they haven't even given their usual signals about an impending move, and the chaos in the Asian and commodity markets is no secret. Both the IMF and World Bank have publicly requested that the Fed not hike at this time. If the Fed hikes and macro conditions around the world continue to deteriorate, it faces some embarrassment if it has to immediately reverse course.
It is a coin toss, but there is a slightly higher chance that no hike will be announced today. The market will be surprised if the Fed does finally make the move to raise.
Figuring out what the Fed is going to do is only half the battle. Even if we could know for sure, we still have to try to figure out how the market will react. The fact that there is so little certainty about a hike or not complicates matters greatly. We haven't priced in the move, because we haven't yet figured out what it would be.
The 2% bounce in the S&P 500 over the last couple days suggests that the market is anticipating something positive. It is probably more likely that traders and computers decided to make some moves because they were tired sitting on the sidelines waiting for the Fed. They sucked in some other folks that didn't want to miss out and now they have until 2 p.m. ET today to adjust their holdings before the news.
Does the market want a rate hike or not? We all know the Fed is pushing hard for a hike and it is coming sooner or later. Many market players would be very happy to have it over with, and would react positively to having the uncertainty lifted. A hike is proof that the Fed is willing to back up their assertion that the economy is improving. Keeping things at zero merely confirms the fact that the worst economic recovery since the 1930s is still a work in progress.
There are many market players who believe that the failure to hike will produce a positive reaction. We all know how the market has loved cheap capital for so long. Higher interest rates, even just a quarter point, start a major shift, and that worries many folks who have grown used to friendly central banks.
What will complicate matters further is whether there are any indications whether a hike is a one-and-done situation or the start of small incremental moves. The hope of bulls is that there is a small hike but that there is clear language that there is nothing further on the table right now. Of course, that means we will have to go through this same process for the next FOMC meeting, but it will satisfy the doves for now.
My gut feel is that the lack of clarity about what the Fed will do and how the market will react is going to produce some big swings as the market tries to figure out what it all means. In recent years the market has a tendency to react favorably to Fed and I expect to see at least one good upward spike, but we will be entering some new territory and there is still going to be much confusion over what it will mean longer term.
My game plan is to forego the predictions and wait to play the reaction. I have no interest in betting on what happens at 2 p.m. ET. I believe we will have some good trading opportunities after the news hit, and that will be my focus.