Twenty-four hours ago, the gloom was thick enough to chop with an ax, the bears were feeling confident and the primary focus was on how miserable earnings were going to be this quarter. That, of course, was a setup for a complete shift in sentiment today.
A Wall Street Journal article by influential writer Jon Hilsenrath was the primary catalyst. He confirmed what many were already thinking, which was that there was no way the Fed could boost interest rates this year with the economic issues both domestic and international. The European Central Bank contributed some dovish comments as well that put a bid under the market.
A weaker-than-expected Philly Fed report not only was ignored but was celebrated as another reason that the Fed will keep rates low for a very long time. There are all sorts of bad news out there, but that is good for the bulls who want nothing more than a continuation of the status quo that has been in place for six years.
What made it worse for the pessimists today was that the bear case was just too obvious. Many were ready to press to the downside, but when we took out the intraday highs around 1 p.m. ET, the squeeze was on. Not only were shorts forced to cover but underinvested bulls scrambled to add long exposure. A big bounce in the biotechnology and drug sectors attracted the bottom-fishers and a reversal in the retail sector eased yesterday's Wal-Mart (WMT) pain.
The problem with mood swings like we have today is that they can shift just as quickly tomorrow. It is very tough to trust momentum in this market, which is one of the big reasons why so few folks are positioned very well. That causes very sudden spikes when we hold up, as well as some panic when things slow down. No one is quite sure what the mood is going to be tomorrow.
Technically, the charts are looking pretty good. Two days of selling were a pause that refreshed. Fundamentally, the economic and earnings news is not so great, but that is a market positive as we celebrate zero interest rates as far as the eye can see.
Have a good evening. I'll see you tomorrow.
Oct. 15, 2015 | 1:43 PM EDT
'Bad News Is Good News' Is Working
- · Sorry, bears, but downside market momentum hasn't materialized.
Given the amount of bad news we have had recently, it isn't surprising that the bears are predicting some doom and gloom. The downside trade may have been too obvious, which is causing the overly aggressive bears to be squeezed. The "bad news is good news" argument for upside may sound trite and lacking in logic, but it is working, and when something works it always attracts people who hate to miss out on the party.
We had a good dip late this morning, but the bulls regrouped and pushed us to the highs of the day. That is triggering some short covering and has pushed breadth to better than 2-to-1 positive. Biotechnology and drugs are leading the charge, which is helping the mood quite a bit given the shellacking those groups have suffered recently.
Technically, there really isn't any strong basis for the belief that the market should gain downside momentum from here. We had a big bounce following the poor jobs report and then we pulled back and consolidated for a couple of days. The bears became excited about that selling and jumped to the conclusion that the recent bad economic and earnings news meant the market was ready to dive deeper.
What the bears are ignoring is the fact that the market loves to love the Fed and loves it even more when there is greater clarity about the next couple of meetings, like there is now. The Wall Street Journal article I cited this morning put a nail in the coffin of the idea that a hike would come in 2015, and that is what we are celebrating today. The fact that there were quite a few bears leaning the wrong way is only making the upside stronger.
Oct. 15, 2015 | 10:45 AM EDT
Can 'Bad News Is Good' Continue to Work?
- · The bulls are more worried about catching a lift than they are about being logical.
The pattern recently is that the early strength does not hold. The sellers usually overwhelm the early buyers because they have some bad news to use as a club. A weaker-than-expected Philly Fed number just hit and we'll see if the bears will leverage that to their benefit.
This morning, the early buyers are active again primarily due to the old "bad news is good" thinking. There are all sorts of negatives out there but the idea that Fed interest rate hikes have been delayed into next year is taking hold and that is what is driving us now. We had a furious rally off the poor September jobs report and that dynamic seems to be at work again this morning.
With the exception of Netflix (NFLX), the FANG stocks are doing well as they are an easy place for underinvested bulls to put money to work. That was the main reason I picked Facebook (FB) as my "Stock of the Week." Technically, it is now dealing with some overhead resistance and is in position to take a run at the highs it hit back in July.
I mentioned yesterday that biotechnology is the main focus of many traders that are trying to bottom fish for a bounce. The group is looking washed out and there are some bounces kicking in now. bluebird bio (BLUE), Esperion Therapeutics (ESPR), Oncothyreon (ONTY), Trevena (TRVN), Second Sight Medical Products (EYES), BioTelemetry (BEAT) and a few others are on my screens.
The big issue we face with this market is how far we can continue to run on the "bad news is good" idea. It worked for years but recently the market has exhibited some desire for a better economy that would justify a more hawkish Fed. After six years the idea that the central bankers can still be a major driver through cheap capital is becoming quite questionable.
The indices are hitting the highs of the day as the bears were unable to repeat the pattern of the last few days. The basis for this strength may seem questionable but the bulls are more worried about catching a lift then they are about being logical.
Oct. 15, 2015 | 7:34 AM EDT
Weak Earnings Are Not Weighing Heavily on the Market, Yet
- Optimism about a dovish Fed is offsetting a steady diet of bad news this morning.
"The chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity, a disappointing development for central bank officials who have been hoping to move this year after a prolonged period of easy-money policies."
-- The Wall Street Journal
The market suffered its second day of higher volume selling on Wednesday after Wal-Mart (WMT) was clobbered for cutting its forecasts. It was retail and consumer stocks that led the market down yesterday, which was a new theme -- oil and commodities had been the primary culprits behind the market pressure that has existed for most of the year.
A mediocre earnings report from Netflix (NFLX) looked like it could be trouble for momentum stocks, but we are poised for a positive open, this morning, anyway. Given the poor news from a company as pervasive as WMT, and the clear signs that the economy is struggling, there are good reasons for more selling pressure. But there is one thing that always seems to save this market, and that is our old friends, the central banks.
The market has managed a very strong run since the terrible September jobs news on the theory that 'bad news is good,' because it means central bankers will keep interest rates near zero for even longer. That dynamic is at work again, this morning. The Wall Street Journal posted an article last night by Jon Hilsenrath, who is widely perceived as being a Fed mouthpiece, stating, "the chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity."
The article cites the weak jobs news, as well as the fact that consumer spending is poor and inflation remains well under targets. A couple of Fed members have been more dovish this week. Three more Fed members are scheduled to speak today with St Louis Fed President James Bullard leading off at 8 am ET.
The 'bad news is good news' has been a very reliable driving force for a long time, but there are increased worries about how much longer this idea can drive the market. If low interest rates haven't boosted the market after six years why should we believe that a continuation of the same policy is ultimately going to make any difference?
The Fed has been anxious to finally hike interest rates because it really is the only way that they can proclaim some form of victory. It is only way to actually prove that the economy has improved. The Fed has been so anxious to finally hike rates that it has been confusing the market to a great degree. Within days of the last FOMC decision that kept rates near zero, Fed chair Janet Yellen gave a speech that almost guaranteed that rates would be hiked by the end of the year. The indications now from the bond market are that it is highly unlikely that the Fed will take that action.
Optimism about a dovish Fed is offsetting a steady diet of bad news this morning. Is it enough to keep this market running, or will doubts about the policy of low interest rates become more severe? There are good reasons to be distrustful at this point but we'll see how the price action develops as we approach the open.
