The V-shaped bounce grew a bit frenzied this afternoon as buyers refused to back off. Technical conditions are quite extended but underinvested bulls and performance anxiety continue to drive the market straight up.
This straight-up action creates a very interesting situation going into the FOMC interest-rate decision tomorrow afternoon. Typically, the market has reacted favorably to the Fed, but the September meeting marked the recent highs and triggered the deepest correction of the year. At this point, market players seem oblivious to any potential negatives but there was a delayed reaction last month and we'll have to see how the action develops when the news hits tomorrow.
There is much grumbling among underinvested longs, but that is nothing compared to the pain being suffered by the hapless bears, who keep trying to call market tops. They have been run over the last few days, but you can bet they will be looking for a "sell the news" reaction to the Fed.
Many bulls would be thrilled to see some downside. This is a speeding freight train of a market, and jumping on board is not only difficult but also very risky. Keep in mind that speeding trains don't just come to a halt suddenly. There will be some warnings if the momentum starts to fizzle. Stay with the trend and be ready to react as conditions change.
Calling market tops is great if you want attention. But if you are trying to make money, respect the price action, even when it seems illogical.
Have a good evening. I'll see you tomorrow.
Oct. 28, 2014 | 1:40 PM EDT
Joyless Rally
- Traders are making money but not acting happy about it.
The V-shaped bounce continues, and market players are growing weary. Once again, traders are making some money, but they don't act very happy about it. That is largely a function of not putting enough money to work, as the market has bounced almost 10% in a straight line.
The S&P 500 is up 8.3% from the lows on Oct. 15, while the PowerShares QQQ (QQQ) is up 10.1%. That is an amazingly strong bounce in just 10 trading days, but the bad news is that it was extremely difficult to take full advantage of the strength. Is there anyone who can seriously say they had anticipated strength of this degree?
The funny thing about it is that given the way the market has acted over the last few years, it isn't that surprising. The combination of central banks and computerized trading enables this sort of movement. It doesn't seem logical to most people, and that is why so many of our rallies are joyless.
Although we are hovering around the highs as I write, I am hearing no talk at all about new buys. I have a couple of potential buys into the close, but there just aren't any prudent entry points, unless you like buying stocks that have been up many days in a row.
Tomorrow afternoon, the Fed will make an announcement on interest rate. Market players will be looking for volatility when the news hits.
OCT 28, 2014 | 10:15 AM EDT
Rooting for the Bears
- But I have no intention of joining them.
Buyers are doing a fine job of keeping the momentum rolling. Breadth is very strong, especially on the NYSE, where it is running 2000 gainers to 725 losers. What is most impressive about this market is the strength in biotechnology stocks. The iShares NASDAQ Biotechnology ETF (IBB) has outpaced the indices since the bottom and is hitting new all-time highs again.
Keep in mind that biotechnology, big-cap momentum stocks and small-caps that signaled the last pullback. Those are the sectors to watch for an early warning of problems. So far, there isn't much to worry about. All those groups are acting well.
You can bet that the bears are going to start anticipating another turn. The obvious trade is to try to short into the Fed. The market is extended and even a bit frothy, so it makes sense to try the "sell the news" approach, but timing is critical and if you are early, you can pay a heavy price.
I'm actually rooting for the bears a bit, although I have no intention of joining them right now, simply because I'm anxious for new entries. My key big-cap momentum names, Alibaba (BABA) and Lannett Co. (LCI), continue to act very well. A couple of new ones are popping up this morning in Vasco Data Security International (VDSI) and Infinera (INFN). I'm looking to add to those as they develop further. Pernix Therapeutics (PTX) continues to look very good but I'm sure not hearing much chatter about new buys.
When I hear lots of talk about what a great market it is but little talk about actual buys, it makes me a bit more cautious, even though the market continues to act very well.
Oct. 28, 2014 | 7:48 AM EDT
Gird for That Fed Announcement
- These have tended to serve as turning points for the market.
In every life there is a turning point. A moment so tremendous, so sharp and clear that one feels as if one's been hit in the chest, all the breath knocked out, and one knows, absolutely knows without the merest hint of a shadow of a doubt that one's life will never be the same. --Julia Quinn
Will the Federal Open Market Committee (FOMC) announcement on Wednesday be a turning point for the market? As we head into the news, the major indices are in a very familiar place. We have another "V"-shaped bounce taking place, and the market is technically overbought.
Typically this would be a good setup for a "sell the news" reaction, especially as quantitative easing (QE) winds down, but that hasn't always been the way it works. Rather than sell the news, the market has been inclined to buy it and keep on running up -- though the last meeting was different.
The last FOMC announcement took place on Sept. 17. On that day, the market closed midrange, and then it hit new all-time highs in the next session. That, however, was the top. The market started a downtrend on Sept. 19 before finally making a low on Oct. 15.
Ironically, the bottom came on comments by St. Louis Federal Reserve President James Bullard, who commented that the central bank should extend its bond-buying program since inflation is so remote and the worldwide economy so weak. Since he made this comment, stocks have risen every day but one.
We're looking at an interesting setup as we head into the next Fed meeting. The impact of the winding-down of QE has not been that big of an issue so far, in large part because the European Central Bank (ECB) and the Bank of China have been embarking on their own forms of QE. The ECB, in particular, is growing more aggressive with bond-buying programs. The slack in the global economy is preventing inflation and keeping interest rates low, and that allows the Fed the luxury of tapering QE operations without causing major disruptions.
While the September FOMC meeting helped to mark a top, the prior meeting on July 30 helped to herald in a bottom. There was great concern at the time about the Fed's QE tapering, but after the initial selloff and some flat action, the market embarked on another "V"-shaped move that took it to the next Fed meeting and the September top.
The key point here is that the FOMC meeting led to turning points in the market a few days after the announcement. This is going to be a particular important event, and the potential is high for a shift in the market mood.
Meanwhile, the market does tend to hold up well in front of Fed announcements. Helping matters right now is that market players are optimistic that Fed chief Janet Yellen and her crew will be market-friendly. We're looking at some decent market strength this morning, but if you are looking to put some cash to work, you are going to have a tough job.
