Taper rally?

End of Day Analysis

MARKET BEHAVIOR
Huge intraday reversal following the Fed’s policy statement that formally launched Tapering, yet pledged to keep interest rates low for years to come.  The day’s range was well over 40-points on 30% above average volume.  Following the initial Taper surge, prices continued ramping into the close as bears were scrambling to buy back their shorts.

 

MARKET SENTIMENT
The market loves to surprise us.  Few expected a strong performance following a Taper  announcement.  In May we tanked in the year’s biggest sell off on a hint of Taper.  In September we surged when the Fed surprised us by not Tapering.  But today we ramped up even more on the announcement of Taper.  The two most likely explanations are the promise of low-interest rates for as far as the eye can see.  The other is removing uncertainty.  Now the market no longer needs to worry about Taper since we know exactly what the game plan is.

The interest rate justification is a bit fishy since the Fed has long promised to keep interest rates near zero.  The other thing is this move is through conventional means that mostly affect short-term interest rates.  Long-term interest rates will largely be set by the market once the Fed’s bond buying program winds down.  The one potential concern for the market is a material portion of this rally’s success stems from companies buying stock financed through ultra cheap bond issuances.  With increased interest rates on the long end of the curve, companies are less likely to continue buying their stock at the same rates.

Without a doubt actual volatility is ramping up as we keep whipping between 1,780 and 1,810 over the last several weeks, but implied volatility tanked today as demand for options plunged due to today’s strength and the elimination of uncertainty surrounding Taper.  A potential red flag is volatility typically increases at market tops due to the messy power transition between bulls and bears.

Trading Opportunities
Expected Outcome:
While I still don’t trust this market, today’s strength in the face of what should have been a selloff shows this market is standing on firm footing.  Sentiment cannot remain at current levels indefinitely, but so far owners refuse to sell their stocks no matter what the headline.  This confidence keeps supply tight and supports prices.

Alternate Outcome:
While today was not the day the market resets sentiment to more sustainable levels, that day is coming and we need to tread lightly.  The safer the market feels, the more dangerous it is.

Trading Plan:
If the market adds to gains tomorrow, a trader can buy with a stop at 1,810 and cost into year-end.  Those that are already in the market need to grow increasingly cautious and protective of recent gains.  Move up your trailing stops up and remember, the more comfortable you are with your positions, the more nervous you should be.  It is tough to be short given this market’s resilience, but the most bold can short this strength if we fail to add to today’s gains on Thursday.  Use a stop above Wednesday’s highs.

INDIVIDUAL STOCKS
AAPL didn’t participate in today’s rebound because China Mobile has not announced the iPhone yet.  Best guess is they are trying to extract better pricing from AAPL.  If China Mobile wins concessions from AAPL, that likely means other carriers will follow.   A couple of years ago AAPL was in the driver’s seat when it had the only smart phone people wanted.  But with Android clones dominating market, AAPL is in a weaker position and phone companies will likely pressure AAPL’s revenues, margins, and earnings.

Plan your trade; trade your plan