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

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