It was a good week for the indexes, with the S&P 500 gaining nearly 1% and the Dow Jones industrial average up about 1.5%, but that action fails to reflect some of the most dramatic events in years.
The first surprising happening this week was a very aggressive rotation out of momentum favorites and into value names in groups like financials and energy. Software and cloud computing suffered the brunt of the damage. The IBD 50 Fund exchange-traded fund (FFTY) , which is comprised of high momentum stocks, lost nearly 5%.
Much of this money flowed into small-cap names. The Russell 2000 exchange-trade fund (IWM) gained almost exactly the same amount that the IBD 50 lost, which was just under 5%.
This rotation didn't have any obvious catalyst, but it is an indication that fund managers are repositioning ahead of the Fed's interest-rate announcement next week. It was not an event that was well anticipated and caught both bulls and bears by surprise.
The other drama this week occurred in bonds. Bonds made a parabolic move starting in early August and that seemed to have been fueled by a move to a safe haven as signs of an economic recession became more apparently. It was an extreme move and many market players characterized it as a bubble.
This week the iShares Barclays 20+ Year Bond Fund (TLT) sold off each day and finished the weak with a loss of 6.3%. It is still above the levels at the end of July, but many market players were comparing the action as similar to the bubble and collapse that occurred in stocks in 2000.
These two big events created quite a bit of instability and randomness, but headlines about the potential for a trade deal with China and some dovish action by the European Central Bank kept a bid under equities.
The charts of the major indexes are in a good position if you ignore the rotation and bonds, and it creates a very interesting setup into the Fed decision on Wednesday. I'll be discussing that in-depth, but the important thing to keep in mind is that the market seems to celebrate a dovish Fed, regardless of how anticipated the news might be.
It is a very unusual market environment right now, and that is likely to continue. The action is not easy to trade, but there is some movement and that always offers opportunities.
Have a great weekend. I'll see you on Monday.