The action this week was a great illustration of a "sell the news" reaction. Everyone was intensely focused on the FOMC interest rate announcement on Thursday. We ran up early in the week on expectations of something positive from Janet Yellen and her gang, but no one was all that clear on what that might be.
When the decision finally hit, we were technically overbought and, after a brief spike to the upside, the "sell the news" reaction hit hard. We closed poorly on Thursday and then gapped down and trended down all day on Friday.
What is most notable about the action this week is that it was actually quite logical. We didn't see the sort of manipulation that has driven traders crazy when overbought conditions become more overbought or when we would rally endlessly no matter what the Fed said or did.
Many market players probably aren't so thrilled with this action. It is a big change from the constant chasing of relative strength that worked so well for so long. We had to maneuver through a series of ups and downs and it actually paid off to sell into strength.
Next week, we are at the peak of negative seasonality, so it will be extremely important to stay flexible and open-minded. Poor market action doesn't mean there aren't good trades. In fact, countertrend moves like we had on Tuesday and Wednesday can be extremely rewarding. Granted, the number of opportunities out there is suppressed, but if you have stayed properly defensive that isn't that big of a negative.
We are in the middle of a big trading range, but sentiment has turned negative and this market will harshly punish any mistakes. If we stay positive, flexible and vigilant, we should be able to handle the market beast quite well.
Have a great weekend. I'll see you on Monday.
Sept. 18, 2015 | 11:12 AM EDT
Time to Do Some Stock-Picking
- · But manage trades closely as opportunities develop.
The poor close Thursday following the Fed's interest-rate decision produced some downside momentum this morning, as market players were forced to recognize that endless low interest rates might not be such a good thing. We have seen a bit of a bounce off the gap-down open but there is no rush of dip buying right now. Breadth is running about 1,500 gainers to 4,000 decliners and the only major sector in positive territory is precious metals.
Good action continues under the surface in small biotechnology names. My Stock of the Week, Trevena (TRVN), continues to plug along and is now up about 27% since Monday morning. Other names I've mentioned -- Exelixis (EXEL), Lion Biotechnologies (LBIO) and Oncothyreon (ONTY) -- are in the green as well. A tendency toward a rotation between oil and biotechnology has helped produce good trading.
Technically, this action pushes the market back into the middle of the trading range that has been in place since the breakdown in August. There is decent support, but this sort of reversal makes overhead resistance more formidable.
Although the overall tone of trading is negative, it is not a bad environment for stock-picking. If you are highly selective, things like the small biotechnology names I mentioned above are working. You have to manage trades closely, but at least some opportunities are developing.
We may see more downside from here, and we'll need to play strong defense, but the countertrend trades are often among the best.
At the time of publication, Rev Shark was long TRVN, EXEL, LBIO and ONTY, although positions may change at any time.
Sept. 18, 2015 | 7:48 AM EDT
The Market After the Fed Is a Trading Market
- The cheap money is no longer working like it once did.
"The recovery from the Great Recession has advanced sufficiently far, and domestic spending appears sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait..."
--Janet Yellen
Some market players were anticipating a positive reaction if the Fed didn't raise interest rates on Thursday. After all, we have been running on cheap cash for six years, so wouldn't it be a positive if the same conditions continued?
The problem is that at some point low interest rates are supposed to produce better economic growth. All that cheap money should have been used to create new economic activity and maybe even generate a little inflation. The fact that it hasn't after this long supports the conclusion that the Fed policies have failed.
Some folks may point to the stock market as proof of the effectiveness of the Fed. We have been trending nearly straight up since 2009 on the tidal wave of cheap cash. Doesn't that mean that the Fed has been a success? Perhaps. If the goal of the Fed was to drive up equity prices, then they have done a nice job, but that doesn't seem to be in their mandate. Their job is to control inflation and to help produce full employment. The results there aren't quite as impressive.
Fed members know that they will be deemed failures if they maintain zero interest rates for much longer. That is why so many of them have been out there recently making hawkish noises. They want to proclaim "mission accomplished," and they can only do that when they can raise rates.
For a long time the market wanted nothing more than endless quantitative easing and zero interest rates. The response to it was powerful buying, as market players anticipated that all that cash would keep running the market up like a crazy Ponzi scheme.
That dynamic now has changed. The cheap money is no longer working like it once did. What the market wants is real economic growth. It has grown weary of financial engineering that has inflated stocks, but has not helped to solve our economic issues.
That is what the market is struggling with at this point. Does it mean we are going to collapse and go straight down from here? It is possible, but all we need to know is that we are in for some sort of struggle at this point. Technically, the indices were a bit overbought and are now failing at resistance levels. We are back in the middle of a trading range and the bears have taken the momentum after the negative reaction to the Fed.
The positive spin is that this is a trading market. We had a good opportunity over the last few days for some gains and an obvious reason to sell and lock them in as we waited for the uncertainty of the Fed news. If you held into the Fed report, you took on a high level of risk and need to deal with the results of that.
We have a poor open on the way. Keep in mind that the SPDR S&P 500 ETF (SPY) is ex-div and that may be impacting the charts a bit. My game plan is to start the hunt again for some new entry points as stocks pull back. This volatility isn't all bad from a trading standpoint.
The bulls may not be too thrilled with this action, but for the active trader this sort of movement is going to give us some good opportunities.
