Understanding the Wall Street Cliché: It's Not the News...
One of the oldest clichés on Wall Street suggests that "It's not the news, but how the market reacts to the news that matters."
Cutting to the chase, Wednesday's market action seemed to exemplify this concept.
While large intraday swings in stocks isn't exactly a new phenomenon, moves of more than one percent tend to be associated with news, rumors, or headlines. And although there was a fair amount of economic data (Retail Sales, CPI, Architectural Billing Index, and Existing Home Sales) as well as an abundance of Fed chatter, there wasn't any key piece of information that seemed to spark the 15-point decline in the S&P 500.
Bullard Started Things Off
Speaking of Fed chatter, St. Louis Federal Reserve Bank President James Bullard got into the act early on Wednesday by "talking taper" just as the S&P 500 (NYSE: SPY) was making the high of the day.
Referring to when the Fed might begin tapering their QE program, Bullard told a Bloomberg television audience, "It is definitely on the table, but it is going to depend on the data." When asked about the timing of the first taper move, he replied, "A strong jobs report, I think, would increase the probability some for a December taper."
Oh, and yes, the algos noticed Bullard's comments, which were good for six or seven S&P points in a matter of minutes.
Then The Minutes Hit
Next, the volatility and the dance to the downside picked up meaningfully upon the release of the minutes from the latest FOMC meeting. However, the strange part is the fact that the Fed minutes didn't really say much of anything - and there definitely wasn't anything new to be gleaned.
Sure, the October FOMC minutes did show that the committee had enjoyed a spirited debate on a number of topics. However, the minutes themselves did not provide any additional insight into the specific timing of when the Fed would begin tapering its QE3 program.
In fact, it was the discourse on the topic of when the taper would begin that was cited as one of the primary problems for the market (i.e. the reason the sell algos were unleashed). According to the minutes, the committee struggled to build a consensus on how they would act under different scenarios. For example, the committee members couldn't agree on what to do if the economy doesn't improve and the benefits of QE program begin to outweigh the costs.
Apparently this confusion and the fact that the FOMC did not completely close the door on tapering in December caused some traders to throw a mini "taper-tantrum" Wednesday afternoon.
What's The Takeaway?
So here's the takeaway. While it is unlikely that the Fed will begin to taper their QE program a week before Christmas, the committee is compelled to say that they remain "data dependent" at this stage. However, every time the algos see the words "taper" and "December" in the same paragraph, sell programs are run.
From a big-picture perspective however, the fact that stocks fell for a third straight day on #NoNews, may be telling. Remember, as the cliché goes, "It's not the news...."
Time to Take a Break?
The key here is the general consensus seems to be that it's time for the current joyride to the upside to take a break. As was discussed in yesterday's missive, there are lots of reasons to be nervous right now. The length of the bull market. Earnings. Valuations. Sentiment. Economic growth. The taper, etc. As such, the vast majority of traders appear to be playing for a pullback right now. And sometimes, these things become self-fulfilling.
But here's the rub. The same folks that are pounding the table about a pullback needing to happen right here and now are also the ones who have been dead wrong all year. Oops.
Sure, stocks are extended. And yes, this rally has run an awfully long way. Oh, and the amount of time that has elapsed since the last correction of 10 percent or more is now quite long. But, it is also important to recognize that Ms. Market doesn't generally appease the masses.
So, while the algos are able to push the indices around in the near-term, the bears have been largely unsuccessful this year. Therefore, unless a real reason comes along, the buy-the-dip crowd may just continue to do their thing into the end of the year.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Fed Policy
2. The State of the Bull Move
3. The Outlook for Economic Growth
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Neutral
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1775
- Near-Term Resistance Zone(s): 1800
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Neutral
- Price Thrust Indicator: Moderately Positive
- Volume Thrust Indicator: Neutral
- Breadth Thrust Indicator: Neutral
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Neutral
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is overbought from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model remains Negative .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Moderately Positive
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Thought For The Day...
The great question is not whether you have failed, but whether you are content with failure. -Chinese Proverb
Looking for Guidance in the Markets?
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The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
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Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:
State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup.
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State's Market Models - Each week we quantify the "state of the market" with a series of models.
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At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
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