Saturday, February 28, 2015

Fed rate outlook for 2015 - down to 55% chance of Liftoff in September, down to %58 chance of second hike in December, down to 43% chance of third hike in January

The main message from this past week was that more than a couple Fed officials seriously want June to be at least on the table for liftoff even if they don't really think a June hike is likely. September is still the prime target for liftoff, although it will depend on whether the data continues to trend as it has or whether the economy accelerate or decelerates significantly. But for now, the trend points to September liftoff.

I'm updating my outlook for Fed rate hikes in 2015 to put a 55% chance (down from 58% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 53% chance of a second hike in December, and only a 43% chance of a third hike (to 1.00%) in January.

IOW, the fed funds target rate will be only 0.75% at the end of the year, which is a rate that is still very supportive of stocks and the stock market.

The odds for a second hike in October are only 39% (down from 43% a week ago), not even close to a coin flip. So, even nine months from now, the fed funds rate will still be only 0.50%, which is truly insignificant for stocks and the stock market.

My forecast is based on the fed funds futures probabilities provided by the CME Group FedWatch web page:

These numbers are based on fed funds futures contract prices, so they are what actual market participants are betting, not the mere whim of some economist or pundit - or even the Federal Reserve itself.

The big debate right now is when the patience language will get removed from the official FOMC meeting statements since that language is assuring people that liftoff will not occur for at least a couple of meetings, with couple being two according to Yellen. Given that the patience language is still operative, that means that no hikes are likely for the next two meetings, March and April, leaving June fair game. If they leave the patience language in their statement in March, that would officially take June liftoff off the table.

The Fed Beige Book is their official input for the state of the economy and business conditions in particular. The next beige book will be released on Wednesday, March 4th. If it shows the economy as strengthening further or at least maintaining its previous trend, then it will be a slam dunk for the patience language to be removed at the March 17-18th FOMC meeting. But if there is any new weakness or concern raised, that would make it a slam dunk to keep the patience language for at least another meeting, taking a June liftoff officially off the table.

Incidentally, the CME Group odds for liftoff in July are now 36% (down from 39% a week ago), and 17% in June (down from 18% a week ago.)

-- Jack Krupansky

Friday, February 27, 2015

NASDAQ tug of war continues

NASDAQ continues its grinding march upwards towards the psychological 5000 level and its March 2000 closing peak of 5048, but it is a brutal struggle along the way and not all stocks are benefiting from the advance. At least some amount of consolidation is seriously needed at some point here, but so far we've had to settle for a lot of intra-day volatility, which is an approximate substitute for the outright consolidation of a true sell-off, but at some point the piper must be paid his due. Meanwhile, the tug of war continues, until... eventually it stops.

In short, NASDAQ is unsure whether it really wants to take a breather here and do some consolidating, or make a surge to a near all-time high. A lot of signs point towards a breather and some serious consolidation, if not outright range trading for an extended period, but... even the most solid expectations are not typically an accurate forecast of actual market movement.

The past couple of days have been driven by a combination of a focus on the Fed, and an incremental recovery of market attention once the Fed was out of the picture. Now its time for the market to get back to coping with the economic and business outlook for the U.S. economy and even individual companies and sectors. Unfortunately, the Fed is still in the picture as people agonize over how long the Fed will be patient and how interest rates will trend once the Fed loses patience, so to speak. Some people still believe that a Fed rate liftoff in June is still likely, but fed funds futures still point to September or October as the more likely time frame for liftoff. Of course, the Fed has already told us that it will be data dependent, so we can expect a lot of volatility as the actual data and perceptions of the actual data and the forecasts for the data vary wildly from month to month, week to week, and even day to day.

NASDAQ futures are modestly negative, indicating a modest pullback at the open, but once again the true trend for the day is not reliably predicted by futures or the opening move.

There is a very good chance that NASDAQ will poke through the 5000 level today, but even if it does, there is no certainty that it will close above that level or even get near the March 2000 closing peak level or intra-day peak. Besides, it is a Friday, so we could also see the volatility associated with a fair fraction of speculative market participants covering positions in advance of the weekend, when anything could happen, especially with Greece, Ukraine, and oil in play.

Regardless of what does happen today, I would wait to see where we are after Tuesday and Wednesday before concluding whether the 5000 level looks to be a solid reality for NASDAQ or merely a flash in the pan or even a mirage.

As always these days, the main market trend is completely in the hands of the hedge funds, who can change their bias between risk-on and risk-off at any time. They may decide to go all-in to ride the NASDAQ 5000 euphoria, or they may decide to cash out before the end, or anywhere in between. Each fund has its own risk management criteria, so we can only sense the net risk bias overall and only after the fact as the net sum of all of their individual actions.

I am prepared for some number of modest to moderate dips in the coming months, with plenty of volatility, but it is still worth noting that a bull market traditionally likes to climb a wall of worry. Ultimately, it is a matter of money flows and how much risk people are willing to take on, and the relative risk and reward perceived for U.S. stocks versus other asset classes. Overlaid on that underlying trend, we have the hedge funds playing the swings of occasional dips and range trading.

-- Jack Krupansky

Thursday, February 26, 2015

NASDAQ struggles to find its feet as Fed focus fades

NASDAQ remains locked in a rather narrow range due to the Fed focus of the past two days. It typically takes the market a couple of days to shake itself out of its daze from focusing too intently on the Fed. Figure that today and tomorrow will be volatile as people struggle to get back to focusing on the economic and business outlook for the U.S. economy for the next nine months. It may be Tuesday or Wednesday before this market finally gets back to its true level and trend.

NASDAQ futures are up moderately, indicating a moderate pop at the open, but as always we must be mindful of the fact that futures and the opening move are not reliable indicators of the trend for the rest of the day. For example, yesterday ended down only a hair, less than a single point, despite a moderate decline at the open.

There was a slight recovery in fed funds futures yesterday after Yellen stuck to her previous posture from her testimony the previous day. There is now a 15% chance of liftoff in June, 33% in July, only 49% in September - slightly less than a coin flip, and a solid 69% chance of liftoff in October. There is less than a coin flip chance of a second hike in December, but a solid shot at a second hike in January. The Fed watches these numbers as closely as anybody, so if they disagreed strongly, they would yelp with various statements by Fed officials.

The main focus right now for Fed watchers is speculation as to when the Fed will decide to remove the patient language, which limits Fed action to be further out than the next couple of meetings. To me, couple means at least two or three, but to some people couple means two. After that couple of meetings, the Fed will revert to its traditional posture of deciding what to do at each meeting based on the data as of that meeting. As they say, the fed is data dependent.

My view is that you can flip a coin whether the patient language is removed in March. I think April is a more likely scenario, which would mean that June was definitely out definitely out for liftoff, July rather iffy, and September also merely a possibility rather than likely.At that stage, people will start focusing on the data more closely. Again, the exact liftoff will be data driven. And all of this analysis is subject to change, as the economic data comes rolling in over the next few weeks.

NASDAQ could surge above the psychological 5000 level any day now... or not. Unfortunately, any action over the next couple of days is mostly recovery from the Fed focus and not indicative of the true trend per se. It also would not surprise me to see some more intensive consolidation in here somewhere, but it ultimately comes down to money flows and the net trading bias of the hedge funds, which we can't know. They may decide to go all-in to capitalize on the frenzy, or they may start taking money off the table to capture profits. There has already been a fair amount of that, but that is not a reliable indicator of how the future will necessarily unfold. They may even instigate a sell-off to capture greater profits on another wild swing downwards before finally pushing the market back up again to a new high. Volatility is the only certainty in the near-term.

-- Jack Krupansky

Wednesday, February 25, 2015

NASDAQ remains on hold pending Fed update

Although the official prepared testimony for today's House Fed hearing will be the same as yesterday, the Q&A will be analyzed carefully for any efforts that the Fed might make to confirm or moderate responses from yesterday, to either confirm their expectations for patience or to trim the revisions to market expectations that were made in response to Yellen's testimony yesterday. I wouldn't expect any changes from Yellen, but a fair fraction of market participants have shown a propensity to over-emphasize even trivial differences in phrasing. In any case, a lot of people will choose to remain on the sidelines until the dust settles, which will only enhance market volatility.

Yellen persuaded people to be a little more patient about liftoff for Fed interest rates. Fed funds futures now give June only a 16% chance, July a 35% chance, and September a slim 50% chance for liftoff. October is still a solid 70%, indicating that it is a coin flip whether liftoff occurs in September or October. There is only a coin-flip 50% chance of a second hike in December. IOW, interest rates will remain very low for the entire rest of the year, which is good news for stocks. Even in 2016, rates will remain reasonably low for the entire year, which is good for stocks.

NASDAQ has shown itself to be remarkably resilient in the face of great uncertainty and anxiety, setting a series of new 1-year and 14-year closing highs. Despite the new closing highs, we're getting a decent amount of intra-day consolidation as well. So far that consolidation hasn't shown up in the closing level, but it's only a matter of time.

Whether and when we break out above the psychological 5000 level and set a new 15-year and all-time closing high remains to be seen, but remains fairly imminent, like any day now. Personally, I prefer a slower and steadier pace of advance that is more sustainable and provides more support for any inevitable pullbacks, but we have to accept the market as it comes to us, each day having a life of its own.

NASDAQ futures are down moderately, indicating a moderate pullback at the open, reflecting a belief that some consolidation is called for here after the extended duration of the recent advance, but as usual, we have to be cautious that futures and the open are not reliable indicators of the trend for the rest of the day. A moderate pullback would not be out of the question here, but an exuberant lunge higher is just as possible. Volatility is the only certainty.

It usually takes a couple of days for the dust to settle after a major Fed news event, so I wouldn't invest too much confidence on what the market does today, Thursday, or Friday. Next Wednesday would be a good time to check in and judge how the market is doing.

-- Jack Krupansky

Tuesday, February 24, 2015

NASDAQ awaits divine guidance

Seriously, NASDAQ is sitting in an idling mode, trying to make up its mind whether to leap above the magical psychological 5000 level or to spin around and dive back downwards in its trading range, or to just flutter and consolidate some more while it awaits divine guidance. All three paths appear to be about equal probability. Maybe divine guidance will come in the form of positive or negative words from Fed Chair Yellen when she speaks before Congress today. Fed funds futures indicate that liftoff will not occur until September or October, but quite a few commentators and even some Fed officials insist that June is still on the table for the first fed funds rate hike. Yellen may resolve that dispute this morning... or not.

Absent the Fed, I would expect continued consolidation until enough of the hedge funds change their bias, either to add more risk and force more short covering that will push NASDAQ up into the sky, or to take more risk off the table and let the shorts depress the market back down in its trading range as they have done so many times over the past year.

I still expect  that NASDAQ will poke through that NASDAQ 5000 level within a few days, but that is only a more likely possibility rather than an absolute slam dunk.

Market breadth is lousy - for the 150 or so stocks that I follow, more were down than up yesterday, even though NASDAQ plodded upwards to a new 1-year high despite spending most of the day in negative territory. Volatility is king right now. It may also take a few weeks of sideways trade range activity before we get there, or at least to build a solid enough base at these levels so that a rally above 5000 is actually sustainable, unlike the rally in March of 2000. Sustainability is the key. You can't take a flash in the pan to the bank.

NASDAQ futures are down modestly, indicating a modest pullback at the open, suggesting more consolidation after the recent strong advance to yet another 1-year and 14-year high, but of course we have to caution that futures and the opening move are not a reliable indicator of how the market will trend for the rest of the day, especially on a critical news day, especially with the Fed Chair poised to speak. Historically, the market is very volatile on such days, and it can take a couple days for the dust to settle and the underlying trend to reassert itself.

I remain fully invested in my investment portfolio and a bit over-invested in my trading portfolio, but with reserves to take advantage of additional dips.

-- Jack Krupansky

Monday, February 23, 2015

NASDAQ poised for both a new 1-year high and more consolidation

NASDAQ still has some lingering upwards momentum that can indeed carry it to yet another 1-year (and 14-year) high, but will face a lot of consolidation in the process. Even if a new high is reached, market breadth will be lousy and quite a few stocks will decline even as the overall index rises. Which stocks are hot or not will vary widely on a daily basis. The NASDAQ 5000 psychological level and a fresh all-time high are indeed close, but may be not so close until people have exhausted their need to see hot stocks consolidate a fair amount. IOW, expect plenty of volatility.

NASDAQ futures are up modestly, indicating a modest rise at the open, but without a lot of enthusiasm or commitment. And as usual, we can't use the opening move as a reliable indicator of how trading will play out for the rest of the day. A new 1-year closing high is very possible, but by no means a slam dunk. Volatility on the other hand is a slam dunk.

Greece, Ukraine/Russia, and oil remain quite volatile. Anxiety will remain high, despite occasional flashes of optimism that quickly evaporate, but the net impact on the U.S. economy and U.S. stocks will be minimal.

-- Jack Krupansky

Sunday, February 22, 2015

NASDAQ 5000 is near

Most people have avoided talking about it out of fear that would jinx it, but the NASDAQ 5000 level is imminent. Like, only 46 points or less than a 1% rise. In truth, there is absolutely no fundamental significance of NASDAQ hitting 5000 - it's simply a psychological milestone or barrier. NASDAQ peaked just above 5000 in the old dot-com glory days of 2000, and then began a long and slow and painful decline to its nadir in the fall of 2002 before beginning an even longer and even slower and even more painful climb back to where we are today.

I'm not going to offer even a rough prediction of exactly when NASDAQ will rise above 5000 again, let alone when that level will be safely behind us, but I see a number of specific scenarios that could play out with roughly equal probability:

1. A 1% rise on Monday would do the trick. Easy enough, but not necessarily a slam dunk.
2. Within a few days, after some consolidation to give us a more solid and sustainable base to build on.
3. Within a few weeks, after we first have a dip and maybe even a test of support to confirm how solid the base is before rallying to the 5000 level.
4. Within a few months, after we first have a combination of a lot of range trading and at least a mini correction or even an outright 10% correction.
5. Within a year, after we have a solid correction and get through the opening hikes of the Fed once liftoff for interest rates occurs in late summer or early fall.

My money would be on #2, but I'll make do with whatever the market has to offer me. I will be pleasantly surprised if we breach the 5000 level on Monday or even Tuesday. Even so, whether or when we hit an intra-day peak above 5000 is a separate question from when we actually close above 5000. Even if we do break 5000 on Monday or Tuesday, it may take a week or more or consolidation before we can stay above 5000 for more than a day or two at a time. In fact, the 5000 level may not be safe until we can reliably close above the 5100 level.

It is very credible that NASDAQ could rally sharply on Monday and shoot through 5000 - that's what it did on March 9, 2000, with a 150-point rally. Unfortunately, that could also be immediately following by a sell-off once the euphoria of the 5000 high wears off and people revert to the mundane details of the economic and business outlook for the overall U.S. economy and individual stocks. March 10, 2000 gave us the dot-com peak, but that was the end of it, with NASDAQ plunging 466 points in three days. That peak day was actually only 2 points higher than the first day over 5000, even though NASDAQ had rallied by 86 points to it's all-time intra-day peak of 5,132.52.

Ultimately, the hedge funds are now in complete control of the market. If they decide to maintain and even increase their risk-on bias, then NASDAQ 5000 becomes a slam dunk. But if, or I should say when, they decide that the recent advance has run out of steam, and they decide to reverse their bias to risk-off, then down we go. Granted, each hedge fund has its own mind, own bias, and own criteria for risk, so trying to figure out the net bias of these funds is not quite feasible, not to mention the fact that there is zero transparency, so we can only judge their risk bias after the fact and in aggregate by the actual action of the market (and mere tidbits of anecdotal stories in the financial media.) They may decide that they can maximize profits by cashing in now, instigating a modest to moderate pullback, and then reversing again and instigating the final leg to push strongly above 5000 sometime in the coming weeks.

Further upstream, banks and pension funds and wealthy individuals make the call as to how much additional money they may commit to hedge funds, or even whether they might make withdrawals of money, both of which can force the hands of the hedge funds to some extent. And the net impact is an increase in volatility.

Even if we do manage to safely close solidly above 5000 or even 5100 within the coming weeks, it is also very likely that we will face significant corrective action to test the support at the 5000 level at some point within the coming months.

In short, prepare for a significant level of volatility in the coming days, weeks, and months.

-- Jack Krupansky

Friday, February 20, 2015

Fed rate outlook for 2015 - down to 58% chance of Liftoff in September, down to %58 chance of second hike in December, down to 49% chance of third hike in January

The main change to the Fed rate outlook from a week ago is that people were persuaded by reading the minutes of the last Fed FOMC meeting that were released on Thursday that the Fed really would be more patient than they had expected, so any sense of liftoff in June or July got tamped down further. September is still a go for liftoff, a second hike is likely in December, but a third hike in January now looks iffy, not quite a coin flip (49.19%.)

I'm updating my outlook for Fed rate hikes in 2015 to put a 58% chance (down from 59% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 58% chance of a second hike (to 0.75%) in December (down from 71% a week ago), and only a 49% chance or coin flip of a third hike to 1.00% in January 2016 (down from 59% a week ago.)

The odds for a second hike in October are only 43% (down from 44% a week ago), not really even close to a coin flip.

My forecast is based on the fed funds futures probabilities provided by the CME Group FedWatch web page:

These numbers are based on fed funds futures contract prices, so they are what actual market participants are betting, not the mere whim of some economist or pundit - or even the Federal Reserve itself.

A Reuters report from Thursday claims that a Fed survey of primary dealers for Treasury debt from January indicated a median expectation of June for liftoff, with September as the next most likely time frame.

That Fed survey is here:

My own reading of that survey, in particular question 3a, is that respondents were indicating a 33% chance of liftoff by June, 43% by July, and 64% by September, with 57% expecting liftoff in September or later. Clearly my reading is at odds with the conclusion of the Reuters reporter.

A NY Fed poll of the 22 primary dealers for Treasury debt taken in early December had September as the expected monthly FOMC meeting for liftoff with 67% chance given by survey participants and only 40% chance in June:

A Reuters poll of the primary dealers two weeks ago showed 10 out of 19 indicating June for liftoff:

A Reuters poll of 82 economists a month ago had two-thirds with Liftoff in June:

That same poll a week ago had 36 of 82 economists (44%) pointing to June and 18 pointing to September. The headline says "Fed to hike rates in June", but 36 is less than half of the economists, so to me that indicates that June is a less likely time for liftoff. See:

Yes, we see lots of financial media reports talking about liftoff in June, some even allegedly based on fed funds futures, which seems odd given the data shown at the CME Group link given above. My take is that these people are simply lobbying for when they think or want the Fed to act, rather than literally reading the fed funds futures. Granted, it is still very possible that the economy will strengthen more than expected in the coming months and force the Fed to move up liftoff to June, but fed funds futures are still our best forecast for now.

Incidentally, the CME Group odds for liftoff in July are now 39% (down from 43% a week ago), and 18% in June (down from 20% a week ago.)

-- Jack Krupansky

NASDAQ poised for another breather... or not

The moderate rally for NASDAQ on Thursday was quite welcome, especially given the relative weakness of the preceding two days, but there is concern that the recent advance is seriously losing steam, especially since the Dow and S&P indexes have been quite weak even as NASDAQ has motored to new 1-year highs this week. The hedge funds are still in the driver's seat, and whether they continue to maintain a bullish risk-on stance or revert back to a bearish risk-off stance could change at any moment.

NASDAQ futures are down modestly, but have been flip-flopping, indicating a relatively weak open, maybe down a little or maybe up a little, but relatively flat no matter what. As usual, we need to heed the caution that futures and the opening move are not reliable indicators of how the market will trend for the rest of the day. As yesterday, I see that NASDAQ could be flat, up modestly, down modestly, up moderately, or down moderately at the end of the day, and that the only certainty is volatility.

It is a Friday again, so a good fraction of short-term speculators will tend to close out positions ahead of the weekend when anything could happen, especially when Greece, Ukraine, and oil are all in play. If hedge funds are net long, they may sell a little, or if they are net short, they may buy a little.

I am indeed a little concerned that the Dow and S&P are so weak, but in truth, this may simply be a modest bout of consolidation, with hedge funds merely playing a lot of the hot momentum stocks in NASDAQ even as the less-hot stocks continue to consolidate. And that may indeed be the best thing for a healthy market in order to be sustainable and not turn into the unsustainable flash in the pan that we saw in February and March of 2000.

Fed funds futures still indicate liftoff for interest rates in September and a second hike to 0.75% in December, but only a 45% chance of a third hike to 1.00% in January. IOW, rates will remain low for the entire rest of the year. And the overall U.S. economy continues to improve, albeit at a sluggish and inconsistent rate that confuses a lot of people on (and off) Wall Street. This is actually an ideal combination for stocks, so the odds are that the market will continue to advance, at least in the coming months - and with a few mini corrections or dips along the way.

The fix really is in for Greece, but the political theater will continue for quite some time. Everybody knows what needs to be done, but domestic politics, particularly in Germany need to be dealt with, and that's a rather unpredictable process, even as the end result is known by the players. In short, investors in U.S. stocks can safely ignore the situation in Greece.

Ukraine will continue to limp along. It is unfortunate that the U.S. and EU have chosen to meddle in Russia's backyard, but that's politics for you. It is politically advantageous for the U.S. and EU to talk up the situation in Ukraine, even as that is not advantageous to the citizens of Ukraine, but they will only push things as far as is politically advantageous and are not seeking to broaden the conflict. Sure, the latest ceasefire is sort of a joke, but it is actually quite useful since it is a clear recognition that the parties don't seek a broader conflict. In any case, the point is simply that investors in U.S. stocks can safely ignore all the chatter about Ukraine.

-- Jack Krupansky

Thursday, February 19, 2015

NASDAQ breather continues

Okay, we had two good days of modest consolidation for NASDAQ on Tuesday and Wednesday, and even managed to inch higher despite the anxiety over whether the recent advance had come too far too fast. Unfortunately, we probably need more of that to consolidate gains sufficiently such that we can begin building a solid and sustainable next leg of the advance and avoid the fate of NASDAQ when it last reached these levels back in the dot-com era in 2000. Back then, stocks zoomed up without looking back, but today investors are always looking over their shoulder, which may be dispiriting, but helps to assure than we are not in a blind mania.

The hedge funds are fully in control of this market, but they are not a homogeneous group by a long shot, and as the past two days have shown, they can be all over the map. Right now, the more bullish hedge funds are duking it out with the more bearish hedge funds over whether the market has more upside or is due for at least another mini correction. And a lot of hedge funds are agnostic about market direction and are simply playing swings and always looking to get the jump on their peers in terms of both sticking with trends that are working, but catching the turning points as well. The big uncertainty is how much longer bullish hedge funds will retain a risk-on bias, how many hedge funds with a risk-off bias will switch to a risk-on bias to fuel the advance, and when the bullish hedge funds will say that enough is enough and reverse to a risk-off bias to send NASDAQ back down into its trading range before the next advance down the road. In short, there is no certainty on that front, other than volatility.

I wouldn't read too much into the history of NASDAQ in 2000, but some people do. I mean, markets set and break highs all the time, but just not every time, so this time is no different. In truth, whether NASDAQ will remain above 4900 or break 5000 or even 5500 is completely independent of what happened in 2000, but a lot of people depend on history as a reference point, even though the economic and business outlook for the U.S. economy is all that really matters for the long run.

It wouldn't surprise me if we had another mini correction of sorts somewhere in here, but a quick review of the chart for the past two years will show you that these market moves give the appearance of having no rhyme or reason. Some more consolidation makes a lot of sense to me, but the market rarely moves in a straight and sensible line. In truth, all market moves are simply the sum of all curves - the sum total of the individual actions of individual market participants, whether they be retail investors, pension fund managers, hedge fund managers, hedge fund traders, or mutual fund managers and traders.

NASDAQ futures are up modestly but volatile, indicating a mixed open that may or may not be higher, but close to flat in any case. Once again, futures and the opening move are not a reliable indicator of the trajectory of stocks throughout the rest of the day. It wouldn't surprise me if NASDAQ ended the day up sharply, down sharply, up moderately, down moderately, up modestly, down modestly, or dead flat, all with about equal probability. I know, that's not terribly useful, other than to forecast a fair amount of volatility. My two most likely outcomes for the day are a moderate, corrective decline, or a modest to moderate advance.

Greece, Ukraine/Russia, and oil remain quite volatile, but everything is still moving towards a quasi reasonable resolution, even if the paths are uncertain and plenty of potholes and detours occur along the way.

I remain fully invested in my investment portfolio, and fairly heavily long in my trading portfolio, but with reserves to take advantage of further dips.

I'll continue to be a dip buyer and trade volatility of quality stocks.

-- Jack Krupansky

Fed rate outlook update: plenty of patience and low rates ahead

The release of the Fed meeting minutes on Wednesday lead a lot of people to believe that the Fed really will be as patient as they were claiming, and that the June chatter is probably only more of a hedge rather than a likelihood. September remains the high-probability time frame for liftoff.

Fed funds futures are now indicating only an 18% chance of liftoff in June and only a 38% chance in July, but still a 55% chance of liftoff in September.

A second hike in October is now less likely, while a second hike in December is more likely. A third hike in January is now unlikely.

In short, interest rates will still be quite low through the rest of the year.

-- Jack Krupansky

Wednesday, February 18, 2015

NASDAQ due for more consolidation

It was nice that NASDAQ actually managed to close modestly higher on Tuesday, but most of the day was spent consolidating after the recent strong gains. That's good news all around, but the bad news is that the level of consolidation was minimal, so a fair amount more consolidation is needed so that NASDAQ will have a firm base to build a sustainable next leg of the advance.

Incidentally, NASDAQ last closed above this level back on March 27, 2000 (at 4959), and first closed above this level on March 3, 2000 (at 4915). NASDAQ has spent a grand total of only 5 days above this closing level, back in 2000, the old dot-com glory days. We are just short of the 4900 level by a mere 73 cents.

NASDAQ spent a grand total of 20 days above the 4700 level in 2000, a record that we have already broken at 37 days - so far, and counting - in 2014 and 2015. This time we've done it in a period spanning three months (so far), which is a lot better and more sustainable than the month in 2000. NASDAQ closed above the 4800 level for only 12 days in 2000. We're at 4, so far.

NASDAQ futures are mixed to slightly down this morning, indicating a weak opening, down (or up) only modestly. IOW, pointing towards another day of consolidation, with no clear trend. Once again, the opening move is not a reliable indicator of how stocks will trend for the rest of the day. We could see another flat day, a renewed rally, or a modest to moderate sell-off. Traditionally, when an advance runs out of steam, a weak day like yesterday is frequently followed by an outright sell-off as the bears feel more emboldened to short stocks. And hedge funds seek action regardless of the direction, so if the trend is not moving higher strongly enough, they would just as soon see the trend move downwards.

I offer no promises as to where the market is headed in the near term, other than that we will see a lot of volatility. I lean towards a continuation of the recent advance, but a fair amount of consolidation is overdue as well. A good mix of rallies and consolidation has the best shot at giving us a sustainable advance, in contrast with the flash in a pan spike above 5000 that we saw in 2000.

Some people believe in absolute patterns and that we are reliving the dot-com days of 2000. I'm more of a Mark Twain kind of guy - he famously said that history doesn't repeat - it rhymes. IOW, there are similarities, but one would be wise not to extrapolate beyond the few similarities that are real.

Incidentally, the breaching of the 4900 level on March 3, 2000 was via a 160-point rally. 100-point rallies were common in those days, 7 in March alone, but rare these days, which is further evidence that history only rhymes rather than literally repeats.

I'll continue to look for sharp dips to buy, as well as cashing out 5% advances on my trading positions, even as I remain a long-term buy and hold for my investment portfolio.

-- Jack Krupansky

Tuesday, February 17, 2015

NASDAQ needs to consolidate a little before moving higher

NASDAQ had a very solid advance last week, but as they say on Wall Street, it may have gotten a little ahead of itself. The best thing at this stage would be to see a little consolidation and base building so that NASDAQ can make a sustainable advance from this level. We don't need the kind of mania that would simply result in a sharp spike up only to be immediately followed with a sharp spike down. That said, the market rarely moves in a nice smooth rational manner. So, be prepared for NASDAQ to move up, down, or sideways with equal probability.

NASDAQ futures are up modestly, indicating a modest pop at the open, but as always the opening move is not a reliable indicator of either the magnitude or even direction of the trend for the rest of the day. Flip a coin whether people pile on to the buying at the open and extend the rally, or whether they sell into any rallies and turn the rally into a sell-off.

Greece and Ukraine and oil are as volatile as ever - no change on that front. Sure, the market may suffer some additional anxiety on these fronts, but they are old news and mostly priced into the markets already.

The complex dance to find a path to a negotiated debt settlement with Greece remains underway and still on track even though that track is certainly not a straight line. Trust me, the fix is in - the leaders in Europe know all too well that they are not willing to see the shock of Greece leaving the Euro. Sure, they are not comfortable or willing to cut a deal yet, but eventually they will in fact cut a deal, as distasteful as they may find it. Don't be confused by all the public theater that this process involves.

The Ukraine ceasefire is going about as well as anybody could or should have expected. The fate of that one key town was never settled in the deal to begin with, and both sides knew that they wanted to try to grab the upper hand before the ceasefire commenced on Saturday. But besides that one key town the overall deal will mostly hold, in a rough fashion, subject to some delays, at least for now. The ceasefire was never intended to be the end-all, just the next step in a complex process, a process that can only end when the U.S. and Europe recognize Russian security interests in the region. They have to agree to not extend NATO presence into eastern Ukraine and not to permit U.S. ballistic missile defense systems to be based in Ukraine. That could take a while.

The recent advance of oil may have been real with a firm bottom, but there is a fair chance that it was a dead-cat bounce that will quickly enough reverse and trade back down. Whether it will trade down far enough to set a new low is unknown, but traders and speculators would be happier if they could see a solid test of the bottom before betting a lot on a further advance. That said, this whole episode is so fraught with speculative activity and outrageous rhetorical narrative that actual fundamentals are almost completely ignored. We do indeed hear plenty of narrative, but with very little transparency to back up the stories being told.

The U.S. economy remains reasonably solid and continues to improve, albeit at the kind of uneven and sluggish pace that confuses and confounds a lot on Wall Street types. And the Fed remains on track for a liftoff of interest rates in September (not June.)

I'm well positioned to profit from a continued advance of NASDAQ, but also prepared to take advantage of any dips along the way.

-- Jack Krupansky

Sunday, February 15, 2015

How long can this NASDAQ advance continue?

It sure is great that NASDAQ has managed to close well over the 4800 level so solidly, even within striking distance of the 4900 level. The November and December peaks and the December and January dips now seem so safely behind us. Looks can of course be deceiving. The big question is how much longer can we expect this advance from the dip to 4600 at the beginning of February, just two weeks ago, to last? Unfortunately, history says that anything can happen at this stage.

Sometimes NASDAQ will solidly hit a new peak and then just completely fall apart. Why? Typically because a lot of the rise was due to the forced buying of short covering, and then as soon as the buying pressure peters out, the shorts come back with a vengeance. We saw this for the November and December peaks.

Sometimes the new peak will persist for a few days. Why? Same as before, but sometimes it can take a few days for the dust to settle before a critical mass of the shorts feel it is safe for them again.

Sometimes NASDAQ will in fact build one or more new legs on the new peak before running out of steam again in a few weeks. We saw this in November, where NASDAQ topped the September  peak at the end of October and then added another 150 points over a month. That was a nice, sweet run. Yeah, although it ended badly with a 250-point plunge to the December trough.

And sometimes, NASDAQ actually can have an extended run-up, as we saw a few times in 2013, such as the run from early September through early December, three months, with no dips of more than 25 points. That's a rarity, but it does happen, and that was less than 18 months ago.

There are a number of key points to consider, some on the plus side, and some on the minus side. On the minus side:

1. Stocks are a lot closer to being fully or over-valued compared to 18 months ago.
2. Some fraction of market participants worry about looming Fed rate hikes later this year.
3. Geopolitical risks, including sluggish Europe may drag down multinationals despite strength in the U.S.
4. Boomers creeping towards retirement will be shifting assets from stocks to bonds or cash.
5. Hedge funds seeking to boost their skimpy returns are resorting to short-term trading of stocks, on both the long and short side, increasing volatility and favoring swings rather than straight-line moves.
6. The specific economic and business outlook has a lot of uncertainty.

On the plus side:

1. The U.S. economy is picking up steam, albeit unevenly, and is significantly stronger than 18 months ago.
2. A growing economy means more money flowing into retirement accounts and pension funds, and from there into mutual funds and stocks.
3. Anxiety over low interest rates on bonds pushes money into stocks.
4. Hedge funds have a lot of heavy short positions in place, so even a moderate improvement in the economy could fuel a fair amount of forced buying to cover those short positions.
5. On any renewed strength in stocks, more hedge funds could shift to a stronger risk-on bias and shift from shorting stocks to going long.

Those were not meant to be exhaustive lists.

There is no simple (or complex) equation to net all of those factors into a single number. Worse, all of those factors are constantly evolving, so that the net effect is extreme volatility.

That extreme volatility does mean that the market can turn on a dime with significant frequency, as we saw with the multiple dips and peaks in January. The good news is that even with volatility, as with completely random events such as flipping a coin, sometimes you can indeed see a whole string of volatile moves that all move in the same direction, just like a string of heads for a flipped coin. That doesn't happen frequently enough to bet the farm on it, but often enough that we need to be prepared for it. Good news can be a black swan event as well as bad news.

In summary, this latest NASDAQ advance could last a day, a week, or a month with probably equal probability. Or maybe even Friday was the end of the advance. Or maybe we have two or three weeks to go. None of these outcomes would be a shock or surprise to me.

And along the way, dips of 25 to 100 points are to be expected for any advance. Typically an advance is made from a number of legs, with modest to moderate dips between them, before we finally see an actual correction of 10%, or even what I call a mini correction of 5% (3% to 7%.)

I do strongly suspect that the advance will last a bit longer, and I am personally betting on it to some extent, but don't hold me to that! And meanwhile I keep enough reserves to capitalize on any big dips of solid stocks, or the overall market for that matter.

-- Jack Krupansky

Saturday, February 14, 2015

Fed rate outlook for 2015 - down to 59% chance of Liftoff in September, up to %71 chance of second hike in December, up to 59% chance of third hike in January

The main change to the Fed rate outlook from a week ago is that the certainty of liftoff in September as opposed to October waffled a bit, while the certainty of the second and third hikes in December and January increased modestly.

I'm updating my outlook for Fed rate hikes in 2015 to put a 59% chance (down from 63% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, a 71% chance of a second hike (to 0.75%) in December (up from 63% a week ago), and a 59% chance of a third hike to 1.00% in January 2016 (up from 54% a week ago.)

The odds for a second hike in October are only 44% (down from 48.61% a week ago), still close to a coin flip, but not enough sense of conviction to call it likely.

My forecast is based on the fed funds futures probabilities provided by the CME Group FedWatch web page:

These numbers are based on fed funds futures contract prices, so they are what actual market participants are betting, not the mere whim of some economist or pundit - or even the Federal Reserve itself.

A NY Fed poll of the 22 primary dealers for Treasury debt taken in early December had September as the expected monthly FOMC meeting for liftoff with 67% chance given by survey participants and only 40% chance in June:

A Reuters poll of the primary dealers a week ago showed 10 out of 19 indicating June for liftoff:

A Reuters poll of 82 economists a month ago had two-thirds with Liftoff in June:

That same poll this past week had 36 of 82 economists (44%) pointing to June and 18 pointing to September. The headline says "Fed to hike rates in June", but 36 is less than half of the economists, so to me that indicates that June is a less likely time for liftoff. See:

Yes, we see lots of financial media reports talking about liftoff in June, some even allegedly based on fed funds futures, which seems odd given the data shown at the CME Group link given above. My take is that these people are simply lobbying for when they think or want the Fed to act, rather than literally reading the fed funds futures. Granted, it is still very possible that the economy will strengthen more than expected in the coming months and force the Fed to move up liftoff to June, but fed funds futures are still our best forecast for now.

Incidentally, the CME Group odds for liftoff in July are now 43% (down from 46% a week ago), and 20% in June (down from 24% a week ago.)

-- Jack Krupansky

Friday, February 13, 2015

NASDAQ looks to extend the rally

NASDAQ did manage to set a new 1-year high yesterday, cleanly above the previous peak in December - by a solid 50 points - so, there is a good chance that this rally will stick and not quickly evaporate, reverse, and revert to trading down in the wider trading range as has happened so many times in the past year. That said, there are no absolute guarantees in this crazy market, so a reversal and decline would not be a giant surprise to me. I remain optimistic but cautious, prepared to take advantage of the market whichever way it moves.

Some positive economic news out of Germany may be enough to override generally negative sentiment about Europe, in particular the sentiment that says that Europe is dragging down American companies who do a lot of business in Europe. Semi-positive news and chatter about Ukraine and Greece is a positive for the market as well. Most of that European chatter is really only a minor weight on the market overall, but can be enough to impact market sentiment on a short-term basis, in both a positive and negative direction, depending on the news of the day. Long term the market will trend based on underlying economic and business fundamentals, but in the short term news adds a layer of volatility above that underlying trend.

NASDAQ futures are up moderately, indicating a moderate pop at the open. As always, the opening move is not a reliable indicator of how trading will unfold during the rest of the trading session. Given that we solidly set a new 1-year high, there is probably enough lingering enthusiasm to fuel an extension to that rally. And to the degree that cynical bears may have shorted the market at the end of the day yesterday in a belief that  a top had been reached, enough of a rally this morning will cause those bears to hit their stops and kick off forced buying in a short squeeze and short-covering rally.

It's a Friday and Monday is a holiday, so some fraction of speculators will tend to close out positions ahead of the long holiday weekend when anything can happen (like a ceasefire supposedly going into effect in Ukraine Saturday night, and more bold and dire chatter related to Greece.) If they are net short they will be buying, if net long they will be selling. Whether that closeout activity will be enough to impact the impact significantly or how significantly is uncertain.

I closed out a lot of my trading positions at a net profit yesterday, but I still have a sizable number of trading positions in play, not to mention my investment portfolio which is fully invested. My primary focus will remain on buying sizable dips of my stocks, and cashing out 5% gains on my trading positions. Overall, I would prefer to let my long positions ride, but given the volatility of the market I am happy to play that volatility as well to boost my returns and give me short-term income as a side effect.

-- Jack Krupansky