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


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