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


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