We've had an extremely moody market so far in the month of December. We've seen an emotional breakdown over junk bonds and crude oil, a celebration of the Fed finally hiking rates, and then a hangover today as the reality of a hawkish Fed started to sink in.
The big issue now is whether the market can get into the holiday spirit and produce some upside as we roll into 2017. Seasonality favors a little partying, but one of the main features of this market all year is being contrary.
Trust levels are low, but the desire for at least a few good trades to end the year is very high. It has been a year of massive underperformance by active managers and many are desperate to produce a little relative performance in the time we have left.
While the selling today wasn't all that surprising, sentiment seemed to turn very quickly and suddenly all the bulls that wanted to buy weakness had second thoughts. Dip buying always sounds good in theory, but it is much more difficult to implement when we see sharp selling into the close.
Technically, the indices more than reversed yesterday's positives and we don't have a whole lot of support before we test the lows of a few days ago. It is pretty classic "sell the news" action, but it has a bit more momentum than is comfortable.
I'm still optimistic about some upside trading in the next two weeks, but we'll have to make sure we don't jump the gun before giving it a go.
Have a good evening. I'll see you tomorrow
Dec. 17, 2015 | 2:11 PM EDT
'Sell the News' Isn't Dead, Just Delayed
- The question is will it set up for tradable upside to finish the year.
The action has eroded and it's a bit a dreary out there, but this kind of pullback is exactly what is needed at this juncture. The market was somewhat overheated going into the Fed, and especially after the euphoric response around the world to Janet Yellen, so this backing and filling is quite healthy.
Breadth has shrunk to 2,200 gainers and 3,500 decliners and all major sectors are in negative territory. iShares 20+ Year Treasury Bond (TLT) is the one bright spot of green on my sector list. Gold and oil are being pummeled again as the stronger dollar takes an additional toll.
While the big-cap "FATMAN" names are mixed, with Facebook (FB), Microsoft (MSFT) and Netflix (NFLX) in positive territory, there is not much interest on the speculative screens. The hot money traders just aren't doing much right now. The solar theme has cooled off and there are just some random movers on my screens -- names such as Second Sight Medical Products (EYES), Digital Ally (DGLY), aTyr Pharma (LIFE), etc.
I'm optimistic that the market is setting up for some tradable upside to finish the year but keep in mind that we are in a period where stocks are often bought and sold for reasons that have nothing to do with fundamentals or technicals. The movement can be much more random.
Dec. 17, 2015 | 11:01 AM EST
'Sell the News' Finally Kicks In
- Market players are working off the Fed euphoria.
As I wrote in my closing post yesterday, it is likely that the normal "sell the news" reaction to the FOMC announcement was simply delayed a bit. We had a classic setup for that to occur, but when something like that is so obvious, the market always does its best to be contrary.
The gap-up open this morning seemed almost too obvious a fade play, but that is working, and the lack of further upside is prompting folks to lock in recent gains. Breadth is still running slightly positive, which is a function of underinvested bulls shopping in the small-cap sector instead of chasing the big-caps again.
The important thing to keep in mind is that the recent action probably increased the supply of potential dip buyers. They didn't want to chase on the Fed since things were already extended, but they will be looking for pullbacks to grab for a ride into the end of the year.
The FATMAN (FB, AMZN, TSLA, MSFT, GOOG, NFLX) names are lagging, while small-caps are showing relative strength. That is a sign that market players are doing a little stock picking again and trying to find higher-beta, speculative names.
I've been a net seller this morning but will be looking harder for new buys later in the day. We need to work off more of the Fed euphoria, but that should help us find setups.
Dec. 17, 2015 | 6:36 AM EST
Fed Interest Rate Hike Turns Into Bear Trap
- Keep that in mind over the next couple of weeks.
"We see an economy that is on the path of sustainable improvement... I don't see anything in the underlying strength of the economy that would lead me to be concerned about that outcome."
For years, the bears have predicted that the market would die a painful death once the Fed started to raise interest rates. If the old adage about not fighting the Fed worked so well when conditions were dovish, then why shouldn't it work equally well in the other direction, when the Fed is hawkish?
Perhaps this shift in the Fed's policy will ultimately be the death blow to the long-running uptrend, but that isn't today's business. Timing a turn of that sort will not be easy, and too many bears are too anxious to impose their pessimistic beliefs on a market that doesn't seem to care much about their compelling logic.
Conditions for a "sell the news" reaction to the FOMC decision seem quite strong, but in the pervasive behavior of the market the things that seem most obvious often result in the exact opposite action.
The market widely anticipated a rate hike and rallied into the news. Rather than lock in some good gains, the buyers continued to push higher. They have grown used to the pattern of V-shaped moves and continued momentum, even as we become overbought or have some good fundamental reason for a reversal.
What adds an extra level of complexity is that we are at that time of the year when money managers are intensely focused on portfolio adjustments that have little to do with fundamental conditions. It has been a very weak year for active money managers; the pressure to make some adjustments and to produce some relative performance is very high. Seasonality favors the bulls for a number of reasons, and we must keep that in mind over the next couple weeks.
In the very early going, the indices look set to gap up. Overseas markets are strong, as their currencies fall against the dollar. Oil is under pressure again, but bonds are general strong.
I expect to see the bears aggressively try to fade this open. We are looking at our fourth day of gains following a technical breakdown, so it makes sense to look for some sort of pullback. However, it is important to keep in mind that this sort of action tends to create strong underlying support and aggressive dip buyers. The folks that missed out on the rally are anxious to not let it happen again. They look for entries on pullbacks, and that prevents the sort of reversals that bears hope for.
It makes great sense, logically, to short the market at this point. We've gone straight up, we have a big "sell the news" event, and the Fed has confirmed its hawkishness. It seems like ideal conditions for a reversal but, like everything else in the market, it is all about timing. The bears may well be squeezed even more, so stay vigilant and don't be in too big of a hurry to look for a collapse.