Bulls attempt a rebound

MARKET BEHAVIOR
Stocks ran up on the heels of the European market’s strength.  We reclaimed prior support at 1,780 and traded as high as 1,790, but the market slipped midday as buying paused.

MARKET SENTIMENT
This was the bounce bulls were waiting for.  The Fed’s meeting starts tomorrow and some of this buying is in anticipation of the “No Taper” surge to new highs.  But if excited bulls are buying the rumor, how many will be left to buy the news?

While everyone is debating “to Taper or not to Taper”, we should really be asking if it matters.  Given the trillions of dollars in bonds the Fed already owns, will dialing it back by $10 billion really make much of a difference to either the Fed’s balance sheet or the broader economy?  Yet it is all anyone is talking about.  The bulk of the debate revolves around taper now or early next year.  Again, this is a relatively small numbers and it won’t make much difference either way, but markets trade emotion, not common sense.  While the economic nuances of Taper policy don’t matter that much, the crowd’s reaction is what we are trying to anticipate.

Whether they Taper this week or hold off a month or two, there is a lot of pressure on the Fed to dial back its monetary intervention, both externally and internally.  Even if the Fed delays Taper, expect the language to firm up as the Fed prepares the market for the inevitable withdrawal of QE.  Bulls might get the “No Taper” they are hoping for, but if the language is hawkish, that could temper enthusiasm.

TRADING OPPORTUNITIES
Expected Outcome:
Markets remain more bullish than they’ve been in years.  While this condition can persist for an extended period of time, it is riskier to own stocks here than at any other point in the last two years.  Since no one knows for sure what the future holds, the best we can do is play the odds and anyone buying this rally is late to the party.  The best buying opportunities arise when everyone is nervous and fearful.  That is clearly not the case here as the crowd widely expects the good times to continue.

While Taper/No-Taper is a coin-flip at this point, we need to evaluate the potential moves in either direction before deciding how to trade.  The market is only 1.5% off all-time highs and 7% above the 200dma.  Given the strong run and the already bullish sentiment, it is hard to imagine a huge upside surprise given how much optimism is already priced in.  On the other hand, markets go up and markets go down.  It’s a year since we last tested the 200dma and it wouldn’t take much of a headline to trip up the market given current expectations.

Alternate Outcome:
The sideways churn between 1,780 and 1,810 saw a lot of owners move to cash.  While not a dramatic move lower, holding these levels for a few weeks allows the market to cool off, making another leg higher more sustainable.

Trading Plan:
The market is in the middle of the recent trading range ahead of the Fed meeting and there is not a lot to do here other than wait for the market to show its hand.  Dipping under the 50dma in coming days is clearly bearish and launching through 1,800 is bullish.  Until then we are all spectators.  I have a bearish bias given the bullish shift in sentiment, but this could go either way.

PLan your trade; trade your plan