Wednesday, May 22, 2013

Market Reverses Following Fed Minutes Release

The markets opened with ebullience after NY Fed President Bill Dudley's comments suggested that the Federal Reserve was not considering any major policy changes, with the Dow reaching the highs of the day - the Dow gaining 155 points - between 10:00 and 11:00 am EDT.

All of a sudden, when Fed Chairman, speaking before the congressional Joint Economic Committee, didn't absolutely rule out that the Fed could begin tapering bond purchases before Labor Day, stocks took an abrupt U-turn, but stabilized in positive territory.

Upon the release of minutes from the Fed's April policy meeting, however, things began to get ugly. The minutes revealed that some members of the FOMC thought they should be tapering - or easing - right away or as early as their June meeting, considering the effects of the program and how the economy seemed to have been improving.

That had a chilling effect on the trading floor, as volume picked up, and stock prices headed south in one of the most volatile sessions in some time - a full 276-point round-trip on the Dow industrials. The other major indices followed suit and actually recorded worse losses, on a percentage basis.

Today's key reversal was a triple-engulfing variety, eclipsing the highs and lows of the three previous sessions, and that, to chartists everywhere, screams of directional bias, in this case, to the downside.

Whether or not traditional chart theory will hold water in this artificial liquidity environment is anybody's guess, because stocks have shown recently an uncanny ability to disregard any kind of bad news, though this kind of news - that the Fed might be pulling back the punch bowl from the drunken, leveraged party that is Wall Street - is of a different nature altogether.

As far as bull and bear markets are concerned, we're still a far cry from calling a turn, though tomorrow, the bull's reign will be entering its 51st month and stocks have just exhibited the kind of explosive move to the upside that is indicative of final tops. The coming days, weeks and months will be critical if only to ascertain whether this move is a one-day event, the beginning of a short-term correction or the start of a bear market.

Key factors to consider in today's movement were volume - one of the highest of the year - the advance-decline line and how meaningfully traders will take the mixed messages from various Fed officials.

Another insight is how fruitless the markets have become, when the only pertinent news concerns whether or not the Fed will keep accommodating the broken banks and brokerages with historical low interest rates, which incidentally, shot higher today, the 10-year breaking through the 2.0% yield mark.

Even more important is whether the Fed is actually planning to take its foot off the gas soon or is blowing more hot air, i.e., jawboning the market.

Considering the relative performance of the US economy (sluggish at best) and the consequences of tightening policy even a little bit from this unprecedentedly-accommodative posture it might be best to take a wait-and-see attitude toward the markets in general. Rather than an abrupt, decisive move to the downside (though it could very well happen), some sideways movements in the markets would seem to make more sense, at least until there is clarity on Fed policy, along with a host of other potential market-moving issues.

Dow 15,307.17, -80.41 (0.52%)
NASDAQ 3,463.30, -38.82 (1.11%)
S&P 500 1,655.35, -13.81 (0.83%)
NYSE Composite 9,501.99, -96.28 (1.00%)
NASDAQ Volume 2,058,095,625
NYSE Volume 4,350,662,000
Combined NYSE & NASDAQ Advance - Decline: 1555-4990
Combined NYSE & NASDAQ New highs - New lows: 753-35
WTI crude oil: 94.28, -1.90
Gold: 1,367.40, -10.20
Silver: 22.47, +0.017

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