Wednesday, June 10, 2015

NASDAQ itching for a bounce

Yesterday wasn't too bad for NASDAQ. Sure, the flimsy available support in the 5000 range (read: none) failed to hold on an intra-day basis, taking NASDAQ all the way back down to the 4975 level, but we did get a semi-reasonable bounce after that mid-morning low, even trading in the green on a couple of occasions, before closing roughly flat. Not bad considering the semi-nasty pre-market sentiment.

Futures are up moderately, indicating a semi-decent bounce at the open, but whether that bounce sticks or quickly evaporates remains to be seen. It all depends on whether the hedge funds decide to get tough and push the sell-off harder, or take the path of least resistance and let the market bounce higher before trying again for another sell-off on another day. Really, it could go either way, especially since people are quite anxious as they wait impatiently for a full week to hear what the Fed has to say about the outlook for interest rates and the economy for the next few months.

Bond market rout? Normally I don't give very much credence to anything that the financial media says, but it is true that sooner or later the bond market will be compelled to adjust for rising Fed interest rates. In truth, we aren't there yet, but there are plenty of players in the bond market who certainly will attempt to front-run the Fed on rate hikes. So it is prudent to expect that the bond market will be quite volatile between now and then, with plenty of little scares that quickly dissipate, but also an emerging trend for higher Treasury and Corporate interest rates over time. Spreads between Treasuries and Corporates will be especially volatile.

Sure, technically, bond rates do have some impact on stock prices, but the precise numerical linkage is as clear and volatile as mud, so don't presume that any given move in the bond market will have a clear and automatic impact on stocks. Also, I expect that companies will incrementally raise their dividend yields in parallel with rising longer-term bond yields, so a lot of the bond market moves will net out for most investors.

Fed funds futures are a bit erratic now, sometimes more enthusiastic for an earlier liftoff, sometimes weaker and more reticent about even an end-of-year liftoff. Currently, they are pointing to a slightly better than coin-flip chance of liftoff in October, only a 1 in 3 chance for liftoff in September, a second hike in January, and a third hike to 1.00% in April. So, Fed interest rates will remain quite low for the next twelve months. This rate outlook will depend completely on the economy. Only a much stronger economy would change this picture much, but that does not appear to be in the cards at this time.

-- Jack Krupansky

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