To Taper or not to Taper

Midday Analysis

MARKET BEHAVIOR
Stocks are modestly lower ahead of the widely anticipated Fed’s policy  statement.  The market is near the lower end of the 1,780 to 1,810 range, while the 50dma is rapidly catching up during this month-long consolidation.  Beyond the moving average, the next level of support is 1,750.

Currently the market is consolidating recent gains, but we need watch out for the next directional move, either a breakout or a breakdown.  Next week is Christmas and we have New Year’s the following week.  If the market holds current levels following the Fed , expect it to coast into year-end on the typical light holiday trade.

MARKET SENTIMENT
Buy the rumor, sell the news, or sell the rumor, buy the news?  Both sides are jockeying ahead of the Taper/no-Taper decision, but since the market is forward-looking, what the Fed does today is less important than what it signals it will do in the future.  At this point today’s Taper/no-Taper is a coin-flip, but most are confident the Fed will come out with more hawkish language that implies the Fed will start winding down monetary stimulus in the near future.  While bulls could get no-Taper today, if the Fed puts in firm language, the market might respond to those forward-looking statements and actually sell no-Taper.

Of course another view is much of this has been dissected to death over recent weeks and the market might coast through this policy statement because it is already priced in.  In that case not much will happen.

TRADING OPPORTUNITIES
Expected Outcome:
Taper is coming, if not today, soon.  While it won’t be a big deal for the economy, markets and reality rarely intersect.  This is a game of perception and the only thing that matters is what other people think.  If the start of taper fills them with fear and they sell stock at a steep discount, the market will crash.  Given the widespread bullishness reported by many sources, there are plenty of confident holders that can be convert into fearful sellers.

If the market falls on Taper, it is simply creating another dip buying opportunity.  The best profit opportunities arise when others are reluctant and fearful, not when the crowd expects good times as far as the eye can see.

Alternate Outcome:
Recent weakness tempted many bears to short this market.  A surge to new highs will be fueled by these shorts forced to buy back the market as it rolls over them.  Only price pays and it really doesn’t matter how sustainable a move higher is, only that is going up.

Trading Plan:
Expect near-term volatility as news-driven traders jump all over the Taper/no-Taper.  In the past the knee-jerk reaction was often a head fake and the market ultimately moved the other direction.  Don’t buy the pop and don’t short the dip.  Wait for market to calm down before trading the resulting move.

Plan your trade; trade your plan