Tuesday, April 28, 2015

NASDAQ needs a little consolidation

Sure, it was very disappointing to see a decent rally turn into a moderate sell-off, but that's par for the course, especially after the extent of the recent advance into record territory. Every market occasionally needs to take a breather no matter how strong it is.

We can't know in advance how far hedge funds are willing to take the current advance before making the decision to lighten up and even reverse to a risk-off bias in preparation for the next downswing of the range trade. Whether Friday set a new upper edge for a trading range or not remains to be seen. I would have expected a somewhat higher edge for the new trading range, but the hedge funds have a logic of their own that they certainly don't directly disclose to us in advance. We can only know what hedge funds are really up to by observing the actual behavior of the market after the fact.

Personally, I would be more comfortable seeing more closes for NASDAQ between 5000 and 5100 to establish a firmer base that will provide better support for a more sustainable advance above 5100. The goal is not to simply shift the upper edge of the old wide trading range upwards slightly, which we have done now, but to establish a new floor for an entirely new trading range that is above top of the old trading range. A core issue is that stocks are relatively overvalued and fresh money flowing into the market is relatively scarce, so nice clean big jumps upwards are definitely going to be fewer and farther between than say two years ago.

As usual, we have equal probabilities for whether we will resume the strong advance, or reverse and trade back down in a wide trading range, or trade in a narrower trading range.

NASDAQ futures are down modestly, indicating a modest additional pullback of the market at the open, but as always we have to caution that futures and the opening move are not reliable indicators of the market trend for the rest of the day.

It is indeed quite possible that we see a little softness at the market open, and then see a strong recovery bounce that completely erases the losses from the sell-off of Monday and then proceed upwards to a new record high. That's certainly not a slam dunk by any means, but is a distinct possibility.

The Fed FOMC meets today and tomorrow, but I don't expect any significant change in their posture - that the economy will likely bounce back from the winter weakness and that liftoff for interest rates will commence sometime in the fall. Fed funds futures currently point to December for liftoff, but that's based on market expectations for where the economy might be in the fall and the Fed has already clearly stated and reiterated repeatedly that they will be data-driven. The Fed will officially say that they will consider liftoff at any subsequent meeting, including even October, September, July, or even June, but consideration and likeliness to act are two distinct and separate issues. Market participants are trying to judge likelihood of action, rather than mere consideration. Also, each Fed official speaks their own mind (unlike the Greenspan days), so we need to be careful not to over-interpret the public statements of the more hawkish or more dovish Fed officials as being too representative of how the Fed FOMC overall might act in a coming meeting. Fed funds futures are now indicating less than a coin flip of a second hike next March, so we are currently looking at a full twelve months of very low interest rates.

-- Jack Krupansky

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