Thursday, March 19, 2015

NASDAQ to stumble around while getting its bearings after Fed outlook revision

The big takeaway from the Fed on Wednesday was that although they would start raising rates relatively soon, it would not be as soon as expected and would be at a slower pace than expected. The dot plot indicates that the rate would likely be no higher than 0.75% at the end of the year, and could well be only 0.50% - midpoint of 0.625%. Fed funds futures are now indicating that liftoff will likely not occur until October, and even next March we would still only be looking at only 0.75%. In other words, a benign rate environment for stocks for an entire year, minimum. The Fed did reaffirm that it will be data-driven, so fed funds futures are being based on market expectations for how the data will evolve over the next year. In any case, a later and slower path for rising interest rates is considered good for stocks.

We did get a semi-decent pop for NASDAQ yesterday, but although 46 points is nice, it was still less than 1%, and therefore not as impressive as one might have hoped. That is actually a good thing - an outsize rally would have simply lead to much more intensive pressure for a corrective move.

The great unanswered question, that even the Fed cannot answer, is how the hedge funds will respond and revise their own risk bias going forward. They may indeed take on more risk in the coming days and weeks, or they may decide that the lackluster nature of yesterday's pop may mean that NASDAQ is more prone to further weakness than further strength. We have no way of knowing in advance how the hedge funds will react, until after the fact and in aggregate. They each have their own peculiar speculation strategies and their own risk criteria, and they each march to the beat of their own drummers.

It may take a few days for the market to settle down into a more clear trading trend, although even then the trend will be quite obscured by the froth of volatility.

NASDAQ futures are down a little, indicating a modest pullback at the open, but that's to be expected after a big gain, as people prepare for at least a little consolidation while the non-traders decide whether to increase or decrease their exposure to stocks. As usual, futures and the opening move are not reliable indicators of how the market will trend for the rest of the day.

The pop yesterday afternoon was a classic relief rally, but whether it has now run its course or has a lot further to run is of course unknown.

It was nice to see NASDAQ poke briefly above the 5000 level again. That may have been a factor in limiting the final size of the rally yesterday. Whether NASDAQ needs to consolidate more before finally establishing a beachhead above the 5000 level remains to be seen. Unfortunately, psychology can have an outsize influence on markets even though fundamentals should in theory be ruling the roost.

-- Jack Krupansky

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