Tuesday, March 31, 2015

NASDAQ volatility remains king

That was a very nice gain for NASDAQ on Monday, but it did seem a little bit too good to believe. A significant portion of the gain was likely due simply to short covering. There are probably still more than a few hedge funds out there who think the market should go even lower before it goes higher. Granted, they were forced to cover those bets yesterday, but there is a very good chance that they will be back, with a vengeance, as soon as upwards momentum peters out. In fact, it appeared to me that upwards momentum did peter out fairly early in the day, with the close only fractionally higher than it was at 1:30 PM and only 6 points above the level it hit at 9:48 AM. IOW, the rally did not advance very far above the level it reached a mere 20 minutes after the open. That is not a good sign.

To be clear, the hedge funds are still in charge and we have no way of knowing exactly what they have in mind for the coming days and weeks and months. But we can be sure that  there will be plenty of volatility.

NASDAQ futures are down fairly sharply this morning, indicating a significant pullback at the open, and not on any truly dramatic catalyst. My belief is that this pullback is merely payback for the forced short-covering of Monday. Ouch. As always, futures and the opening move are not reliable indicators of the trajectory of the market for the rest of the day. The opening pullback could lead to another dramatic sell-off, but it could also lead to selling exhaustion, which could then lead to a dramatic recovery, maybe even to a net gain for the day, all with equal probability.

It all comes down to how many hedge funds stick with their current trading bias, how many of them switch to a more aggressively bearish risk-off bias, and how many of them switch to a more bullish risk-on bias. Even if most hedge fund traders make no net change, a few can tip the balance in either direction, and that balance can shift rapidly and frequently, leading to an excess of market volatility.

We are still indeed locked in a trading range, with volatility being the main driver. Hedge funds will switch or double down on their risk bias based on which market direction seems to be the path of least resistance and the quickest profit potential, which varies from day to day, and even hour to hour.

It looks like my SEP-IRA retirement contribution funds are cleared. I'll leave most of the cash as reserve and incrementally open positions on dips and bargains. There are probably a few positions I will open anyway, but mostly I will be opportunistic. I'll also keep some reserve or at least park some of it in some relatively safe stocks that I can then reallocate for great opportunities as they appear. All of my trades will be posted on my Seeking Alpha feed.

My short-term trading will be a bit limited for the next few weeks or so as I recover from the loss of a substantial capital cushion as I pay my taxes and estimated taxes on April 15th. I also need to pay more attention, for the moment on allocation of my retirement accounts. Still, I do expect to do at least some short-term trading, especially as volatility gives us some big dips.

-- Jack Krupansky

Monday, March 30, 2015

NASDAQ remains mired within its trading range, but hopeful

Thursday may have been the low for this downward swing of NASDAQ off the peak of Friday ten days ago. We had a decent bounce from the opening low on Thursday and then a semi-decent recovery rally on Friday. But since the recovery rally was on a Friday and only semi-decent (less than 1%), there is still a chance that this nascent recovery could crumble and turn into a new low for the swing. Still, it does look quite promising.

I'm sure we will see NASDAQ at 5000 again soon enough, but we will have to trade up through this trading range first, and that could be a rather volatile process. It only took three days to fall down to Thursday's low, but it could take a week or more to recover from that fall. Or maybe only another two or three days. It all depends on how aggressive the hedge funds decide to be. They may try again for a new low for the swing, or just ride the rocket to a new peak and then kick off the next downward swing that much sooner.

NASDAQ futures are up fairly strongly this morning, indicating a fairly decent pop at the open. As always, futures and the opening move are not reliable indicators of the market trajectory for the rest of the day. There is no particularly great catalyst for the strength of futures today, so there is some non-zero chance that it could be a fake-out and hedge funds could use it as a ruse and sell heavily into the rally. We'll have to see how it plays out. In any case, the hedge funds are in control of the market.

My own trading will be lighter than usual for the next month or so as I focus on tax payments for April 15th and my SEP-IRA retirement contribution. My contribution is in transit right now - I'm not absolutely sure when the funds will be avavailable to trade in my retirement account, but most likely within a day or two. I need to refrain from trading any of the stocks I sold last week for losses for at least 30 days or I will run afoul of the Wash Sale Rule. Of course there are plenty of other great stocks to invest in. I may just park the contribution in a handful of my preferred stocks, plus keep 25% in cash as a reserve, and then reallocate after my 30 days and as dips occur. I don't expect to do frequent trading in my retirement accounts, but reallocation on dips is a viable strategy.

Once I have all of my tax payments squared away I will resume heavy trading, but with a significantly smaller trading capital base. I will have to reduce my nominal trade size but then still be able to keep up my trading pace, although my trading has been and will be based on trading opportunities, such as big dips for quality stocks. I also have a couple of new accounts I can trade in more cheaply so that I can make a larger profit with smaller trades.

-- Jack Krupansky

Friday, March 27, 2015

NASDAQ meanders in its trading range

Mark my words, NASDAQ will be back at 5000 soon enough, but... we may have to do some serious meandering in the wide trading range before we get there again (and again.)

Whether we have much more downside left in the current swing remains to be seen. The sharp decline into the close on Wednesday screamed capitulation to me, and the major bounce off the intra-day low on Thursday seemed like a strong signal to me as well, but even strong signals frequently are not a solid substitute for reality. So, NASDAQ could have some more downside, but relatively soon it should begin meandering back towards the upper portion of the trading range.

There is a decent chance that we will see a relief rally today, but even so, it could simply be a classic dead-cat bounce to be followed by renewed selling next week.

As I keep noting, the market is at the complete mercy of the hedge funds. Whether we see further declines or bounce back is completely dependent on how the funds shift their risk bias in the coming days. They could maintain or increase their risk-off bias and send the market lower, or they may indeed sense that further downside has limited prospects for profit, and decide to reverse their bias to more risk-on to seek greater gains on the upside. Rinse and repeat. Trading ranges and volatility can be quite profitable for them.

NASDAQ futures are down modestly, indicating a modest decline at the open, but as always we must note that futures and the opening move are not reliable indicators of the trading trajectory for the rest of the day, as we saw yesterday with NASDAQ closing well above the opening level despite very negative futures.

Today is another Friday,so some fraction of speculators will tend to liquidate positions in advance of the weekend when anything can happen. If they are net short, that could mean a rally.

Personally, I will have to do some serious selling over the next two weeks to raise the cash for my 2014 retirement contribution and to pay taxes on April 15th. I'll take some losses, but my retirement contribution will be able to pick up some decent bargains as well.

-- Jack Krupansky

Thursday, March 26, 2015

NASDAQ back to swing trading within a range

Well, the really good news is that the obsession with the Fed is now officially over. No sane, credible sources are indicating that the Fed will likely raise rates before the fall. The bad news is that the hedge funds are back in force with their old strategy of swings within a trading range.

We saw it coming on Monday and Tuesday as upwards momentum evaporated and began to crumble. Traders and speculators are addicted to momentum, so if momentum peters out, there's only one thing to do - reverse your risk bias and trade in the other direction, and continue doing so until that momentum peters out as well. Rinse and repeat.

We had half a dozen major trading range swings last year. I don't expect this year to be much different.

How much further down will this swing go? As I said, we are at the complete mercy of the hedge funds. What we can control is when we buy and when we sell, but not what the market itself will do. My personal strategy is simply to keep enough reserves to buy on dips, and then use a reserve of patience to outlast the dips. Hedge funds have a lot more money, but are mostly rather short when it comes to patience. How long did the October dip last? Or the December dip? Or the January dip? Days, weeks, a month or two, that's the time scale for hedge fund swing trading.

We'll be back to NASDAQ 5000 soon enough, but between now and then, nobody can predict the exact timing or the exact path of the market. The two successful strategies are to either simply stay the course, or to buy on dips. Trying to time the swings is well beyond my ability. The best I can do is to acknowledge their existence and take advantage of them as they happen.

NASDAQ futures are down sharply, indicating a big dip at the open, but as always, futures and the opening move are not reliable indicators of the trajectory of the market for the rest of the day.

The news? No, this market move has little to do with any news, nor with anything to do with economic or business fundamentals. It is purely a technical move based on momentum and money flows, or lack thereof. Any references to the news are strictly cover for the underlying technical moves.

-- Jack Krupansky

Wednesday, March 25, 2015

NASDAQ continues to consolidate

I was actually relieved that the early rally turned into a minor rout yesterday since consolidation is really what is needed at these levels to assure the sustainability of further gains. More consolidation would be even better, but I should be careful what I wish for because a minor rout can quickly turn into a major sell-off.

The fact that NASDAQ closed back below the magical psychological 5000 level is a minor concern but no big surprise since NASDAQ still doesn't have any firmly established support at these levels, which is the whole point of the need for consolidation. Sometimes a close below a critical level is a really big deal, but sometimes a minor break below a critical level is also just noise and statistical error that can quickly be erased - but not always, and without any solid guarantee. We'll have to take a wait and see attitude. In any case, a modest and healthy amount of profit-taking is typical during any advance. In fact, the more profit-taking, the healthier and more sustainable to advance will be.

NASDAQ future are up modestly (again), indicating a modest rally at the open, but as always, futures and the opening move are not reliable indicators of how the market will trend for the rest of the day.

The market may waffle a bit today as people desperately try to decide whether the declines on Monday and Tuesday were nothing more than some modest consolidation or the early stages of a steeper sell-off.

As always, we are at the complete mercy of the hedge fund swing traders here. It is impossible to say whether their net risk bias will become more positive or more negative in the coming days. The only thing that we can be positive about is volatility.

I have a mountain of tax bills to pay on April 15th, as well as my 2014 SEP-IRA contribution, so I'm going to be doing a fair amount of spring cleaning on my portfolio over the next few weeks, primarily selling stale trading positions, typically at a loss. I hate taking losses, but spring cleaning is a good thing in all cases. I still haven't decided what I will invest in with my SEP-IRA contribution. I had invested the idle cash in a taxable account over the past year, giving me a combination of trading gains and (coming soon) losses as I liquidate those positions to make the contribution in two weeks or so. It amounts to more than 10% of my existing retirement portfolio - last year was my best year ever, which is why my tax bills (including estimated taxes) are so high. The anticipated losses will still be only a modest fraction of my net gains for the year to date.

All of those tax-related sales and payments will significantly reduce the overall size of my trading portfolio, which means either less trading or maybe just smaller trade size for the next couple of months. I may restrict myself to just one or two best trades each day. And I may restrict myself to mostly trading dips in the last half hour of the trading session.

-- Jack Krupansky

Tuesday, March 24, 2015

NASDAQ desperately needs to consolidate at these levels

It's great that NASDAQ has managed to close above the magical psychological level of 5000 again - for two consecutive days, but we've been there before and we know how that movie ended, so we desperately need to do something different this time. The main trick is building levels of support so that when inevitable corrective action does occur, traders have perches to rely on, rather than immediately reverting to a free fall. It is also imperative to have enough range trading to squeeze out as much froth as possible so that the market doesn't lurch between meteoric rises and free fall. Actually, so far, this time has indeed fit that bill and is likely to continue to do so. There really is more than enough cynicism out there and a fairly minimal level of complacency, so that a repeat of the badness of the dot-com boom is much less likely, at least for the time-being. Who knows, maybe a year or two from now the story will be much different, but for now, the level of caution in the market is downright awesome, which is a good sign for patient investors and patient speculators, and for traders of all stripes who love volatility.

Now, whether NASDAQ hangs out here and establishes solid support just above the 5000 level remains to be seen, but it does indeed have a decent probability. Sure, we could surge up again towards 5100 or even 5200 in short order, or pull back to 4900 or even 4800 again, but a moderate level of volatile range trading is the most likely outcome given the players and the economic and financial conditions at this time.

NASDAQ futures are up modestly this morning, indicating a modest pop at the open, possibly in relief that there was not more serious profit-taking yesterday after Friday's close well above the 5000 level. As always, futures and the opening move are not reliable indicators of how the market will trend for the rest of the day.

It may still take a few more days for the markets to settle into a groove and fully adjust to the full ramifications of the Fed's announcement last Wednesday, but we seem to be getting there. Trading today and tomorrow might finally get us over the hump. Fed officials have been giving speeches this week to fine tune their overall message from last week, but there have been no major revelations or sea changes.

Fed funds futures are shifting around a bit, but the overall picture remains unchanged - Liftoff for Fed rates will occur in the October time frame, the rate will probably be 0.50% at the end of the year, a second hike will occur in January, and even a year from now, after the March 2016 FOMC meeting that rate will only be 0.75%, which is still quite low and will remain quite supportive for stocks. The probability of liftoff in October is 63%. September is still an outside possibility if the economy picks up, but right now is only a 43% chance, well less than a coin flip.

-- Jack Krupansky

Monday, March 23, 2015

NASDAQ waits for the hedge funds to make their next move

Hey, NASDAQ has closed above the magical psychological 5000 level again, and by a decent margin. Great... but now what? It will still take a few more days for the markets to fully digest the revised Fed rate outlook from last Wednesday, so don't get too excited either way by whatever happens for the next couple of days. In fact, we may have to wait until next week before judging the revised market trend.

Meanwhile, we are just as at the mercy of the hedge funds as we have been for the past few years. Will more of them flip the switch and take a stronger risk-on bias for a new leg up to the advance, or will more of them flip the switch the other way to more of a risk-off bias and take their profits off the table and even bet on a near-term decline to profit from the swing trade back down in the trading range? Unknown, completely unknown. You might as well flip a coin. There is indeed a solid chance that on net they will gamble for a further advance, but profit-taking is a good bet too. Volatility is a solid bet too as this tug of war plays out in the coming days.

NASDAQ is getting close to uncharted territory, literally. There have been only two closes above this level, back on March 9 and 10 in 2000 during the peak of the dot-com boom and bubble. And NASDAQ traded at this level on only five occasions, on March 9, 10, 13, 24, and 27 in 2000. All of that is ancient history and there is no reason to expect any exact repetition, but nonetheless traders always look to history as their primary guide to the future. Besides Friday, when NASDAQ opened above 5000, stayed above 5000, and closed above 5000, we have only had one other day this year when NASDAQ even traded above 5000, on March 2, and that was only for a mere half hour into the close, too brief to merit treatment as more than a mere fluctuation than any kind of indicator of a trend.

NASDAQ futures are down modestly, indicating a modest pullback at the open, which would still leave NASDAQ positioned well above the 5000 level. As always, futures and the opening move are not reliable indicators of how the market will trend for the rest of the day.

The simplest outlook for the next couple of day's is that NASDAQ is once again overdue for a breather and needs a few days of consolidation before making its next definitive move. But of course Wall Street rarely does exactly whatever the doctor orders. Again, volatility will be king, so expect some interesting, buyable dips for selected stocks regardless of the overall market trend.

-- Jack Krupansky

Sunday, March 22, 2015

Fed rate outlook for 2015 - 67% chance of Liftoff in October, 62% chance of second hike in January

The big takeaway from the Fed on Wednesday was that although they would start raising rates relatively soon, it would not be as soon as expected and would be at a slower pace than expected.

The FOMC dot plot indicates that the rate would likely be no higher than 0.75% at the end of the year, and could well be only 0.50% - midpoint of 0.625%. Fed funds futures are indicating a second hike to 0.75% in January and no hike in March 2016. In other words, a benign rate environment for stocks for an entire year, minimum.

The Fed did reaffirm that it will be data-driven, so fed funds futures are being based on market expectations for how the data will evolve over the next year. In any case, a later and slower path for rising interest rates is considered good for stocks.

I'm updating my outlook for Fed rate hikes in 2015 and early 2016:

1. Liftoff in October - 67% chance.
2. Second hike, to 0.75% in January - 62% chance.
3. No Third hike at March 2016 FOMC meeting - 44% chance of hike to 1.00%.
4. There is some possibility that liftoff may occur in September, but it is unlikely - 46% chance, less than a coin flip.

IOW, the fed funds target rate will be only 0.50% at the end of the year - and only 0.75% from January up to the March FOMC meeting a year from now, which is a rate that is still very supportive of 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.

Incidentally, the CME Group odds for liftoff in July are now only 24% (down from 37% a week ago), and 9% in June (down from 18% a week ago.)

-- Jack Krupansky

Thursday, March 19, 2015

NASDAQ to stumble around while getting its bearings after Fed outlook revision

The big takeaway from the Fed on Wednesday was that although they would start raising rates relatively soon, it would not be as soon as expected and would be at a slower pace than expected. The dot plot indicates that the rate would likely be no higher than 0.75% at the end of the year, and could well be only 0.50% - midpoint of 0.625%. Fed funds futures are now indicating that liftoff will likely not occur until October, and even next March we would still only be looking at only 0.75%. In other words, a benign rate environment for stocks for an entire year, minimum. The Fed did reaffirm that it will be data-driven, so fed funds futures are being based on market expectations for how the data will evolve over the next year. In any case, a later and slower path for rising interest rates is considered good for stocks.

We did get a semi-decent pop for NASDAQ yesterday, but although 46 points is nice, it was still less than 1%, and therefore not as impressive as one might have hoped. That is actually a good thing - an outsize rally would have simply lead to much more intensive pressure for a corrective move.

The great unanswered question, that even the Fed cannot answer, is how the hedge funds will respond and revise their own risk bias going forward. They may indeed take on more risk in the coming days and weeks, or they may decide that the lackluster nature of yesterday's pop may mean that NASDAQ is more prone to further weakness than further strength. We have no way of knowing in advance how the hedge funds will react, until after the fact and in aggregate. They each have their own peculiar speculation strategies and their own risk criteria, and they each march to the beat of their own drummers.

It may take a few days for the market to settle down into a more clear trading trend, although even then the trend will be quite obscured by the froth of volatility.

NASDAQ futures are down a little, indicating a modest pullback at the open, but that's to be expected after a big gain, as people prepare for at least a little consolidation while the non-traders decide whether to increase or decrease their exposure to stocks. As usual, futures and the opening move are not reliable indicators of how the market will trend for the rest of the day.

The pop yesterday afternoon was a classic relief rally, but whether it has now run its course or has a lot further to run is of course unknown.

It was nice to see NASDAQ poke briefly above the 5000 level again. That may have been a factor in limiting the final size of the rally yesterday. Whether NASDAQ needs to consolidate more before finally establishing a beachhead above the 5000 level remains to be seen. Unfortunately, psychology can have an outsize influence on markets even though fundamentals should in theory be ruling the roost.

-- Jack Krupansky

Wednesday, March 18, 2015

NASDAQ roller-coaster ready for liftoff, enjoy the ride!

The Fed announcement this afternoon is much anticipated, to the point that the market will react not to the actual content of the announcement, which has already been anticipated and factored into stock prices, but simply out of relief that the announcement is out of the way. We also have the post-announcement press conference, so the market will be doubly volatile as traders wait for that to finish as well.

Sure, there will be some actual news embedded in the announcement. Like the precise, actual words that the Fed now starts using. Will they just remove the patient language, or will they substitute some new language as well? But this will be a relatively minor side show.

The other key news people are waiting for is the so-called "dot plot" in the new FOMC economic forecast that indicates the anonymous expectations of individual FOMC members for the path of rates in the coming years, and this year as well, but as a whole year. That is very interesting, but unfortunately it is not at the fine resolution of specific FOMC meetings or even quarters. Unfortunately, there is no reliable way to average those individual forecasts into an accurate forecast of an event that will in any case be data-driven for data that even the Fed does not yet have in their hands. Sure, the market will  react to the dots, but that will just be a short-term blip - as the data will begin to evolve even before the ink of the dots dries.

NASDAQ will be volatile, as the markets always are around a key Fed announcement. Up, down sideways, all preferences will be met, if only for a few seconds or few minutes, as the trend goes crazy and changes as soon as a new trend starts to emerge. The market moves in the minutes after the announcement are not a reliable indicator of how the market will close, or how it will trend in the coming days. It will take a couple of days or even a week for the market to settle into a clear trend once the Fed uncertainty is out of the picture.

This much is certain: the Fed will not be changing interest rates today, tomorrow, next week, or next month, or even the next couple of months (even the June meeting is still three months away.) How much more certainty do people need! Besides, stocks should be priced based on the sum total of individual investor expectations of the economic and business outlook six to nine to twelve months from now. Beyond that is absolutely beyond the collective power of the market to forecast. The traditional view is that markets can predict nine months out.

Fed funds futures are still pointing to September as liftoff for rates, with a 61% chance. The odds of a hike in July (there is no FOMC meeting in August) is only 41%, well less than a coin flip. And the odds of liftoff in June are only 20%, which means that it would be extremely unlikely, and probably more of a worst case hedge than an outright bet.

NASDAQ futures are down moderately, indicating a moderate pullback at the open, but as always, futures and the opening move are not a reliable indicator of the trend for the rest of the day. A moderate pullback would be perfectly sensible after the positive moves on Monday and Tuesday, and given that the roller-coaster of volatility is on tap for the afternoon. If there is a sustained pullback during the morning, that only increases the odds of a strong rally after the announcement, and vice versa if the market turns to a rally this morning.

Enjoy the ride!

-- Jack Krupansky

Tuesday, March 17, 2015

NASDAQ to tread water while Fed meets

The potential for just a few words to jolt the market tomorrow afternoon will cause many market participants to stand still and hold their breath. It's a slam dunk for the Fed FOMC to remove the patient language from its statement at 2:15 PM on Wednesday, but until the deed is done and the exact language is dissected, all bets will be on hold. And when the statement comes out, the market will bounce around in all directions, not because of confusion about the statement, but simply because that's what happens when traders hold back and then suddenly let loose their frustration with trying to do nothing. Traders are never paid to do nothing. It's not in their DNA. We can still expect a lot of volatility and maybe even a big move up or down - and even a number of big moves up and down, even today - since that's not uncommon with volatility.

The market could end the day roughly flat, or up or down a little, or have a big jump or sell-off, all with equal probability. Volatility will be king, and with volatility in control anything can happen, even big moves (like yesterday), but none of this is fundamentally significant.. None of this will have anything to do with long-term economic or business fundamentals. Mostly noise, and lots of it.

Fed funds futures prices are still indicating that Fed rate liftoff will most likely occur in September. Sure, various Fed officials have indicated that they want the flexibility to be able to move in June, but there has not been a strong chorus of Fed officials arguing for a hike in June itself. Flexibility and action are not the same thing. The main point about removing the patient language is that it begins to return the Fed to its normal mode of operation, namely data-driven. The problem is that it is the interpretation of the data that can be problematic and very subjective and leads to confusion between the market and the Fed. Even with the formal patient language removed, the Fed will always be a lot more patient than the ADHD-afflicted traders on Wall Street. So, the mindless chatter about hiking in June is just that - mindless.

The best way to keep the Fed in perspective is to focus on the overall U.S. economy. The Fed only jumps into action when things get too hot or too cold. With a relatively happy medium they tend to sit still. The recovery from the financial crisis still has a ways to go. GDP is still not consistently booming. Employment is gaining, at a healthy clip, but the labor participation rate and under-employment are still problematic. Wage growth is far too tepid. Inflation gets whipped around by energy and food prices, but has tended to be weaker rather than stronger. All in all, we're getting there, but only at a pace that suggests moderation rather than abrupt change. Fed funds futures point to a rate of only 0.75% even a year from now. That rate will not be tough for the stock market to swallow.

NASDAQ futures are down modestly, indicating a modest pullback at the open. A little profit-taking and consolidation is not uncommon after a big rise such as on Monday. As always, futures and the opening move are not reliable indicators of the market trend for the rest of the day.

The Fed press conference after the announcement will be almost as consequential as the announcement itself. People do tend to over-parse even the tiniest nuances in language, which will only add to volatility.

It will probably take at least three days or even a full week for the market to settle down from the moment the FOMC announcement hits the screens on Wednesday. In truth, there is like zero fundamental significance to all of the volatility that will transpire, but Wall Street is usually more about trading volatility than the underlying long-term trend.

-- Jack Krupansky

Monday, March 16, 2015

Fed rate outlook for 2015 - down to 56% chance of Liftoff in September, down to 55% chance of second hike in December, down to 43% chance of third hike in January

The five main points about the Fed rate outlook for this week are: 1) the patient language is likely to be removed from the FOMC statement on Wednesday, 2) Although the FOMC wants the flexibility to hike in June, they will not do so, 3) September is still the most likely time frame for liftoff, 4) even at the end of the year the fed rate will be only 0.75%, and 5) even in January through mid-March of next year the fed rate will remain 0.75%. IOW, there is very little reason to be concerned about any impact of interest rates on stocks for a full year from now.

I'm updating my outlook for Fed rate hikes in 2015 to put a 56% chance (down from 66% a week ago) of liftoff (hike from the current 0.0% to 0.25% range to 0.50%) in September, no second hike in October (only a 40% chance vs. 54% a week ago), a 55% chance of a second hike in December, and no third hike (to 1.00%) in January (only 40% chance vs. 66% a week ago.)

IOW, the fed funds target rate will be only 0.75% at the end of the year - and through January and up to the March FOMC meeting a year from now, which is a rate that is still very supportive of stocks and the stock market.

Some people are betting on liftoff in July and even June, but that may be more of a hedge rather than an outright bet.

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.

Incidentally, the CME Group odds for liftoff in July are now only 37% (down from 45% a week ago), and 18% in June (down from 22% a week ago.)

-- Jack Krupansky

NASDAQ could bounce, but will it stick?

We saw a nice, semi-decent bounce in NASDAQ on Thursday, but much of that eroded on Friday. That could be a bad sign, but I never get excited by modest to moderate losses on Fridays since so many speculators tend to dump positions ahead of the weekend when anything can happen. NASDAQ is indeed overdue for a more decent bounce after the recent declines, but bounces are common in down markets as well as up markets. A decent bounce would be well over 1%, maybe 65 points. NASDAQ could also continue to erode until it finally is able to marshal the enthusiasm for multiple decent gains in a relatively short interval of time.

Is the recent market weakness all about the Fed, removal of the patient language, and the strong dollar? Partially, a little, but mostly those factors are simply used as headline cover for speculators taking advantage of the occasional evaporation of strong upwards buying pressure to force some consolidation and downward swings in a wide trading range. Traders like to make money, even when nothing important is happening.

NASDAQ could bounce but then make another desperate lunge downwards to test the support of the December market peak around the 4800 level. Or maybe not. Traders and speculators would likely wish to try to do that test, but the hedge funds are in the driver's seat here and it all amounts to what net risk bias they choice to take on in the coming days. It is not uncommon for them to wait for moments when too many people are leaning in the same direction, and precisely then to reverse their trading bias to force a dramatic short-covering short squeeze rally (or sell-off at the other end of the trading range.)

Fed funds futures are still pointing to September for liftoff, with only a 19% chance of liftoff in June and a 40% chance in July. Futures also still point to a fed funds target rate of only 0.75% at the end of the year, and less than a coin flip of even hitting 1.00% in January or before the FOMC meeting next March, so rates will remain quite low for a full year, which is well beyond the normal horizon for trading and most speculation in the stock market. The mindless chatter of a hike being likely in June is just that - mindless, but Wall Street is famous for mindless behavior - traders need something to do between the too-infrequent occurrences of sane behavior.

NASDAQ futures are up moderately, indicating a moderate rally at the open, but as always futures and the opening move are not reliable indicators of the trend for the rest of the day. The big question is whether the rally will essentially fizzle and result in either another loss or maybe just a moderate gain, or whether it sparks some real enthusiasm and we finally do get a true, decent, outsize bounce of well more than 1%. We could indeed see such a bounce today, or tomorrow, or sometime this week, but whether it marks (or confirms) the turning point of the next upwards swing of the market is a true coin flip.

Some people may wait for the Fed to weigh in on Wednesday, but a lot of people on Wall Street are prone to jumping the gun. Expect a lot of volatility. We could also see a strong advance before the FOMC announcement on Wednesday, but then actually see a sell-off. It may also depend on what words the FOMC uses to describe the thought processes they went through when removing the patient language. No matter what, volatility will prevail.

-- Jack Krupansky

Friday, March 13, 2015

NASDAQ pauses to catch its breath, unsure what's next

That was a semi-decent bounce for NASDAQ yesterday, but only semi-decent, and definitely not great. Sure, 43 points sounds like a lot, but these days that is less than 1%. A decent bounce would have been 65 points or more. The good news is that the rally built as the day progressed, right into the close. But the bad news is that this might merely have been a classic dead-cat, short-covering rally, which means that as soon as buying pressure dissipates, the shorts will be back and even more fiercely determined to push the market down than before.

The great unknown is how hedge funds are adjusting their risk biases, yesterday, today, and beyond. We can't know if they were just trying to manipulate the market yesterday with a temporary, one-time goose to their risk bias or whether they may indeed be flipping their risk bias to take on more risk. They might do the former simply to get a higher entry price and to try trick naive speculators back into the market, in preparation for a renewed downwards push. Or, it may be the latter and they may indeed have decided that the downward push has mostly run its course, and that greater profits can be made through volatility by reversing the direction of the market swing to head back upwards in the trading range. Both possibilities have roughly equal probability.

Sure, all eyes are on the Fed meeting next week and on the strong dollar, but... the reality is that both factors are relatively minor compared to the overall health of the U.S. economy, which is incrementally improving as every day, week, month, quarter, and year goes by. Sure, there are bumps and potholes along the way, as there are in even the strongest of economies, but it is the overall long-term trend that matters for most investors. These dips and trading ranges simply provide additional opportunities to trade on market volatility, which is about all a lot of these hedge funds have these days.

NASDAQ futures are currently modestly negative, indicating a modest pullback at the open, but they are quite volatile today, so they may change their magnitude or even direction by the time the open actually occurs. It would not be unusual to see a little profit-taking after the semi-healthy rally yesterday, but that is only a possibility, not a slam dunk. As always, we must keep in mind that futures and the opening move are not reliable indicators of the path of trading for the rest of the day. Volatility will remain king. It's also a Friday again, so a fair fraction of speculators will be inclined to close out at least a fraction of their positions ahead of the weekend, when anything can happen. Whether that means a pullback or a further rally rather depends on whether their net positions are long or short.

Fed funds futures are down for both June and July rate hikes, but up for a September hike, firming up a return to expectations before the jobs report last week. To reiterate, liftoff will most likely not occur until September. All the chatter about a hike in June or before September is just noise that should be discounted. The U.S. economy is reasonably healthy and getting stronger, but is still not showing the kind of runaway strength that would cause the Fed to jump sooner and faster, as a lot of the mindless chatter is suggesting.


-- Jack Krupansky

Thursday, March 12, 2015

NASDAQ still eyeing a recovery bounce, but also eyeing the Fed

It was no surprise that the NASDAQ rise at the open yesterday immediately fizzled and went nowhere for the rest of the day. The amount of the opening pop was just too tiny to incite any major enthusiasm. The good news is that even without significant upwards pressure, there was also a distinct lack of interest in a resumption of the sell-off. Instead we had a basic staring contest, with the bullish camp and the bearish camp each waiting for the other to make the next major move. I think the bears may be getting tapped out and may have exhausted this downward switch in the trading range, while the bulls are waiting for confirmation that that is the case before venturing further. In short, yesterday was a stalemate. I consider that a positive sign - it could have been much worse, with a steeper sell-off.

Hedge funds remain the key - if more of them switch to a risk-off position or deepen the capital they are willing to deploy on shorts, the sell-off will resume, but if just a small fraction of them switch from risk-off to risk-on, we could see a dramatic short-covering rally. The only problem is that short-covering rallies are not sustainable by themselves, with the bears simply waiting a day or two and then re-opening their short positions with only increased fury. The bull theory is that once a few hedge funds switch their bias, more of them will incrementally follow suit over the coming days once the rally shows some sustainability and we can then trade back upwards in the full trading range.

The Fed? Mostly that is simply noise at this stage. Sure, the Fed will most likely remove the patient language in their statement next Wednesday, but that is now old news, and most of the Fed officials and fed funds futures consistently point to the fall and September in particular for liftoff of interest rates, so there is zero short-term impact of anything the Fed might do next week. The odds of liftoff in June are down to only 19%, and 40% in July. Even September is down to 58%, which is better than a coin flip, but not a slam dunk. The fed funds target rate will most likely be only 0.75% at the end of the year, and only a coin flip 50% chance of rates being 1.00% in January and up to a year from now.

Ditto for a strong dollar - it is mostly noise and will be a net wash for most companies and stocks.

NASDAQ futures are up moderately (again), indicating a moderate rise at the open, but it is still worth noting that futures and the opening move are not reliable indicators of the trajectory of trading for the rest of the day. I'm optimistic that we could see a much larger bounce than futures suggest, but of course that is no slam dunk. And if futures and the opening move are too weak, that will only embolden the bearish hedge funds to double down. The flip side is that doubling down by the bearish hedge funds at this late stage puts them at greater risk if their bullish brethren sense that too many people are leaning too far in one direction and decide to jump on the other side with enough conviction to kick off that short-covering rally I was talking about. Either way, volatility will reassert itself.

Hedge funds like to trade on volatility, so if volatility runs low as it did yesterday, the path of least resistance - and maximum volatility and profit - is to switch the direction of the market and trade in the opposite direction, and keep switching whenever volatility runs out. That's why we see trading ranges so frequently in major advances, as we did last year.

-- Jack Krupansky