Wednesday, February 04, 2015

NASDAQ poised for a some consolidation in its trading range

NASDAQ's short-term trend is once again up in the air. We had another solid rally yesterday, but once again it was a bit shaky and volatile, indicating that not all market participants are on board with a continued advance. OTOH, that's the way the market is a lot of the time, regardless of the true trend. In any case, NASDAQ seems primed for a little bit of profit-taking and consolidation here, but whether that is taken care of in very short order or a more extended trading range is a coin flip. It is indeed very possible that the market hesitates just a little and then lurches to a new 1-year high in the next day or two or three, but it is also almost equally possible that the market once again reverses and trades back down towards the lower edge of its wide trading range.

The hedge funds are fully in control - every day they get to decide whether they want to take more of a risk-on bias to help push the market higher or more of a risk-off bias that drags the market back down. They each act on their own, although it sometimes seems as if then act as wolf packs. The net market movement is what I call "the sum of all curves" - add up all of the actions of all individual market participants, which includes you and me and millions of other small investors, but we are just the icing on the cake of the larger pool of money controlled by the institutional investors exemplified by the mutual funds and the hedge funds. Decisions by mutual fund money managers are also a key factor, but in recent years they have been eclipsed by the more nimble and far more active hedge funds.

NASDAQ futures are down moderately, indicating a moderate decline at the open, but as always the move at the open is frequently a poor indicator of how trading will progress during the day or either the magnitude or direction of the net move for the day. Flip a coin whether people pile on to the opening dip for some serious consolidation or even a renewed sell-off, or whether they simply buy the dip and shoot for a third day for the advance.

Oil (OIL) has had a nice rally here, finally touching $50 again, but flip a coin whether this was a solid recovery bounce or merely a classic dead-cat bounce as bearish speculators simply took a little money off the table as their stop-buy orders were triggered but otherwise maintain a decidedly bearish stance. Once again, the extreme nature of the fall below $75 is much more about asset allocation by speculators than about real supply and real demand. There is no single global oil market and oil markets are far from transparent, which leads to a lot of wild speculative moves. The wild ride will continue. I'll take continue to take advantage of these wild swings for short-term profits.

I remain fully invested in my investment portfolio, but will continue to trade the dips and swings. Yesterday I bought more Stratasys (SSYS) and 3D Systems (DDD) on the former's 33% dip. And last night on bought more Chipotle Mexican Grill (CMG) on their post-earnings 7% dip. Sure, these stocks may decline further, but they are solid companies with great prospects. My primary trading objective is a 5% to 10% recovery bounce, but I'll settle for even a 4% or 2% bounce. These are just a couple of examples of the trading opportunities that Wall Street presents us with every day.

Meanwhile, the U.S. economy continues to plug away and gradually and incrementally recover from the financial crisis and housing bubble, albeit at too slow and uneven a pace to satisfy the many ADHD-afflicted traders on Wall Street. Even in the best of economies it is very common to see a fair amount of volatility in the monthly and even quarterly economic data. Traders trade the latest news, while investors focus on the longer-term.

It now looks like there might be a 50% coin-flip chance of a Fed rate hike liftoff in September, but more likely that event won't occur until October, which is still too far out to have any real impact on the markets. Sure, people will talk, and some people will try to front-run the move too far in advance, but the overall strength of the U.S. economy will be the primary driver of the U.S. stock market over the next four months.

-- Jack Krupansky

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