It is probably a safe bet that Wednesday's ramp higher into the close left more than a few folks scratching their heads. The move created fresh all-time highs for the S&P 500 and the venerable DJIA. But wait, hadn't the market been hit hard just a couple days back? And after nearly three weeks of sideways action, wasn't everyone under the sun looking for a meaningful correction to begin? So, what gives?
The start to Wednesday's trading offered no sign of what was to come. The Bank of England had gotten the bears' attention by talking about raising rates sooner than had been expected. And there was a fair amount of disappointment over the results of China's latest long-term planning session. And before one could pour a second cup of coffee, the S&P 500 had opened down nearly 0.5 percent.
The opening sell algo pushed the S&P below the prior day's low and to hear the bears tell it, things were about to get ugly.
The Bears Thought They Had a Case
The fact that the market opened lower wasn't surprising. European bourses were down across the board and Asian markets finished with big red numbers. In addition, the glass-is-half-empty crowd could be heard touting the sentiment indicators, which were starting to get a little frothy, and the idea that valuations were becoming stretched.
The bear camp went on to cite the slowdown in revenue growth, the lackluster GDP numbers, and the fact that the gains in housing are unsustainable. Now toss in the overbought condition and fact that the Fed was back to "talking taper" again, and well, it appeared that the traders in the bear caps might just have the edge.
As a result, the bulls could be heard nervously talking about the important support just below. The general thinking was that as long as the S&P stayed above last week's algo-induced low at 1747, things would be okay. But again, there wasn't exactly a lot of swagger seen in the bull camp Wednesday morning.
Everybody knows that regardless of where one starts counting, this bull is getting old. Everybody knows that there is some froth in the mo-mo names. And everybody knows that this type of environment has a tendency to end with a bang.
And They're Off
However, within minutes of the opening bell, the market stabilized. And within an hour, the early losses were erased. And then right before the time traders were heading to lunch, the buy algos arrived. Just like that, the bulls were off and running.
However, most traders recognized that there were some important earnings coming after the bell (Cisco for one) and some fairly important economic data (Retail Sales, US Productivity, and Weekly Jobless Claims) this morning. As such, it was assumed that the move up that had occurred at about 12:15 eastern wouldn't last.
Then The Fireworks Started
But then a funny thing happened. Instead of the expected intraday pullback, another round of buy algos hit the tape. And then another. And then, with less than an hour left in the session, stocks spiked higher, and higher. Boom, there were new all-time highs.
The question of the day, of course, was what had triggered the spike to new highs? There hadn't been any big headlines. Nope, just a lot of algo-induced buying.
Still All About the Fed
Turns out that rumors of what was in Janet Yellen's prepared testimony started making the rounds. And the algos apparently liked what they read.
First there was the fact that Ms. Yellen would say that 7.3% unemployment is too high.
Then there was the comment about the Federal Reserve needing to do more to support the economic recovery.
And finally, the future Fed Chair wrote, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."
Suddenly QE-Infinity was back. Suddenly, traders were reminded of the recent papers written by Fed officials talking about lowering the unemployment trigger. And suddenly, the "Dectaper" seemed like a really silly idea.
Although the algos will start fresh again today and they could always reverse yesterday's "breakout" on the charts in a matter of minutes, it would appear that this market is still all about the Fed. And with Janet Yellen's prepared remarks sounding pretty darned dovish, the bulls may be looking to start the year-end rally earlier than normal this year.
Turning to this morning... Foreign markets largely followed Wall Street's lead and built on the Yellen-induced rally. However, earnings from both Wal-Mart and Cisco have curbed the enthusiasm in the U.S. in the early going.
Positions in stocks mentioned: none
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editor and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.