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


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