Monday, June 15, 2015

NASDAQ waiting impatiently for the Fed

The Fed is the main game for this week. Not that there will be any big change, nor is any big change expected, but people want to hear it as a fact from the Fed itself that the Fed has no big change to make. Everybody wants to see the updated dot plot, but the odds of it being a lot different from current expectations of liftoff in 2015 are virtually zero. Still, people need to hear it from the Fed.

Whether liftoff occurs in October or December depends on how the economic data trends over the next four months. Unless the data gets a lot stronger than currently expected, the Fed could do either. The odds of the data being strong enough for liftoff in September are essentially zero.

The Fed has no magic special knowledge of how the economy will evolve over the next few months, and they have made crystal clear that their moves will be data-driven, so nobody should expect that we will have any great clarity about liftoff until it is almost about to happen. Maybe it will become clear when we are about a month away, or maybe even two. In any case, the Fed will want to be sure that they are really sure that the economy is solidly on track for a few months of economic data. We aren't even close to being there yet.

My view is that the Fed will want to see solid data reports for the months of July, August, and September before pulling the trigger in October. A move during the summer seems rather unlikely, and they will probably need the month of September to get their liftoff plan finalized. Only a few weak data reports between now and then would push liftoff out to December or January.

Greece? No real change on that front. Both sides are intent on running out the clock so that they both are forced to accept politically unacceptable compromises. That's just the way these kind of things have to be done these days. In any case, a compromise deal is inevitable. The IMF is pushing for pushing out debt payments, which seems likely. And Greece will end up agreeing to reforms that they can't yet publicly agree to. The real point is that traders like to use these periods of uncertainty and anxiety to justify trades that they would have done anyway, like the ups and downs of range trading.

NASDAQ futures are down moderately sharply, indicating a moderately sharp pullback at the open, but as always we must caution that futures and the opening move are frequently not reliable indicators of the market trajectory for the rest of the day. The only certainty is volatility.

Traders may simply be testing NASDAQ to see if we can establish firmer technically support in the 5000 range. If we can, we could see a recovery bounce. Otherwise, we couldĀ 
see a sharp sell-off.

We will probably see whipsawed markets up through, during, and after the Fed FOMC announcement on Wednesday afternoon. We could see any combination of moderate and sharp upwards and downwards moves. It will take a couple of days for the dust to settle after the announcement. By a week from Wednesday we will probably be roughly back where we are right now, give or take 75 points, with all possibilities being roughly equal probability.

We could easily see both a sharp sell-off and a sharp rally before or shortly after the Fed announcement on Wednesday.

NASDAQ is sitting roughly at the bottom of the 5050 range, which isn't bad by itself, but we have no nearby solid technical support, so we will be prone to selling pressure until we finally do establish a decent technical base in the 5000 and 5050 ranges.

We could see a moderate sell-off in the morning, but then a semi-decent recovery as the day progresses. It's all up to the hedge funds and whether they decide to push deeper with a risk-off trading bias or push higher with a risk-on bias to catch the shorts leaning too far and kick off a little short-covering rally.

In any case, NASDAQ will be open to a reversal on Tuesday and Wednesday as well as people continue to impatiently wait for the Fed at 2 PM on Wednesday afternoon.

Did I mention volatility?

The real bottom lines are that even with liftoff in the fall, interest rates will still be quite low a year from now, and the economy will be picking up steam, which is what is required for liftoff in the first place. Both eventualities are supportive of the stock market.

Correction? Corrections can always happen at any time and usually without warning. Analysts have predicted 25 of the last 3 corrections. That's a joke! But it's also reality. Sure, we're overdue for a correction, but the intensive range trading actually works to our benefit on that front, constantly squeezing out the excesses that lead to corrections in the first place.

-- Jack Krupansky

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