Wednesday, March 11, 2015

NASDAQ thrashes through the consolidation process, but eyes a recovery

That was a decent day of consolidation for NASDAQ on Tuesday. The fall-off near the end of the day, with very little interest in buying despite plenty of little mini-bounces all afternoon, strongly suggests a sense of capitulation, which is needed to mark the end of any significant consolidation phase. Now, that doesn't necessarily make it a solid slam dunk that the consolidation is complete, but is a very bright sign nonetheless. We had a strong advance in February, so it was no surprise to see a harsh consolidation phase. In fact, its harshness is a positive and healthy sign, indicating that even a minimal amount of market froth is not to be tolerated. Froth is what kills any market, so less froth is a good thing. This bodes well for a more sustainable long-term advance, despite the intensity of the short-term pain.

NASDAQ futures are up moderately, indicating a moderate bounce at the open, probably mostly since the steep decline yesterday seemed overdone. As usual, futures and the opening move are not reliable indicators of how the market will trade for the rest of the day. On the down side, the futures rise is not as sharp as would be expected if there really was a great catalyst for a solid recovery, and we really are at risk that the hedge funds may maintain a risk-off bias and simply sell into any rallies. On the plus side, the cumulative effect of the consolidation to-date seems sufficient and maybe a little too over-extended, so I suspect that at least a few hedge funds have profits from shorting during the decline that they are getting antsy to protect, so they may indeed be more inclined to flip from risk-off to a risk-on trading bias than the other way. May - but not a slam dunk by any means.

With the intensity of the recent decline, there is probably an excessive level of open short positions, so that any decent recovery bounce will kick off a wave of short covering, which will build on itself into a decent short squeeze that sends the market even higher.

Again, to be clear, I am not guaranteeing that the selling of this consolidation phase (or mini correction) is absolutely over, but simply noting that the odds lean towards a recovery somewhere in here.

It is also very possible that we could see a solid but dead-cat recovery bounce today, but then see renewed selling tomorrow or next week. You know, another fake-out like Monday. Possible, but maybe not as likely. The strength of yesterday's sell-off was so much more impressive, and the feeling of a sense of capitulation at the end of the day, lead me to sense that a real recovery is a real possibility. Just not a slam dunk per se.

That said, I have to reiterate the reality that the hedge funds are in total control. They took a risk-off bias in January and drove the market down. Then they flipped the switch and took a risk-on bias that drove the market higher in February. Then they... you get the picture. So, now the question is how long they will retain their net risk-off bias before flipping it again for the next leg up of the overall, long-term advance. Maybe they will do the flip today, maybe tomorrow, maybe next week, maybe after the Fed FOMC announcement next Wednesday, or maybe a few days after the FOMC announcement when the dust has settled. In any case, each hedge fund has its own risk policy and own trading bias, and makes its own decisions with its own timing, so we can only sense their bias collectively and after the fact. Nonetheless, we must be cognizant that these processes are the backdrop for market activity.

Despite the chatter, fed funds futures still indicate September as the most likely time frame for liftoff of interest rates, with only 21% chance of liftoff in June and 44% in July. IOW, all the chatter that a hike is imminent are nonsense. The economy is still in a recovery mode, and recovering at too slow a pace to force the Fed's hand at a quicker pace than indicated by fed funds futures. And even with a liftoff in September, futures are indicating that the fed funds target rate would still be only 0.75% at the end of the year, and 1.00% a year from now. All of these rates are far below the level that would put actual, fundamental pressure on stocks, even dividend stocks.

The strong dollar is still a net neutral for stocks, so it is mostly simply noise for traders to cover their underlying technical market moves.

-- Jack Krupansky


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