Fed Saves the Day

S&P500 daily at end of day

End of Day Update:

Stocks surged to one of the largest gains of the year following accommodative language from the Fed. But it wasn’t all smooth sailing when early trade saw us slip to 1,925, ever so slightly undercutting last week’s lows. If this holds, that counts as a double-bottom, one of the most common bottoming patterns.

While journalists and talking heads credit today’s strength to the Fed, the news was actually quite bearish. The Fed is concerned about weak global growth and how a strong dollar will adversely affect the domestic recovery. But the half-full crowd cheered because that delays the inevitable rate hikes and who doesn’t like cheap money?

But regardless of the headlines, there were only so many people left to sell following the last several weeks of gut-wrenching volatility. Once the pessimists sell, they no longer have a vote in what the market does next. Those that held through the weakness and those that bought it exhibited confidence and their conviction kept supply tight and propped up prices. While the dip was unnerving, it is very Chicken-Little like to let a 4% pullback make us think about jumping out of windows. But that is the nature of markets; dips only work when they convince everyone the world is imploding.

Thursday is an important day for both technicals and sentiment. While today’s rebound was impressive, it still left us shy of the 50dma, something that acted as resistance over the last week. Stall again and there is little doubt we are headed back to 1,900. But if we break through, look for a continuation to all-time highs in coming weeks as bears scramble over each other to buy back their short positions. At the same time, don’t expect fireworks since moves tend to be fairly symmetrical. A 75-point dip typically only leads to a 75-point breakout, but that would push us close to 2,100 by year-end.

The bigger concern is if the rebound stalls and the selloff spirals out of control, shattering the nerves of previously confident owners, turning them into fearful sellers. There is no doubt we have a date with a larger correction, the only question is if happens this fall, or waits until next year. But, rather than guess, we will let the market show us.

Jani