Welcome to Wait-and-See Mode
After Tuesday's dance to the downside, it is easy to fall into a trap by thinking that the next trading day will become a "tell" for what will happen next. Although "confirmation" of a move is indeed a thing in technical analysis, it is important to remember that confirmation can take days or even weeks to occur. And from my perch, yesterday's action represented nothing more than traders moving into wait-and-see mode.
Sure, stocks were volatile again yesterday. And yes, after starting off with a pop to the upside, the S&P 500 did make a modest new intraday low during the session. However, we need to keep in mind that there was a fair amount of "stuff" that traders could have been waiting on. Thus, I'll argue that yesterday's tape was a throw-away.
First and foremost, everyone was waiting to see what Janet Yellen's final Fed statement might look like. There was a fair amount of talk that the Fed Chair would her last meeting as an opportunity to establish a more hawkish stance for incoming Chairman Jerome Powell, who takes the reins on Monday.
Although the text from the FOMC statement was little changed from last time, the WSJ notes that there were some subtle differences and that these changes can be interpreted as the FOMC leaning a bit more hawkish. For example, in the statement released yesterday afternoon, the Committee referred to the labor markets and business investment as "solid." In addition, the FOMC decided to add the word "further" to "gradual adjustments in the stance of monetary policy" as a way to suggest more rate hikes are on the way.
In response, yields were volatile after the report and the futures-based probability of a rate hike at the March FOMC meeting traded very close to 100%.
On the subject of rates, I'll opine that traders are also waiting and watching to see if the current spike will continue. After the yield on the 10-Year moved through 2.60%, technicians suggested in a rather emphatic manner, that the next stop would be 2.8%. So, with yields continuing to push higher, closing yesterday at 2.72%, there are those who are concerned that a continuation of this move could become problematic for stocks. Thus, sitting on your hands and waiting for this situation to play out makes some sense.
It can also be argued that anyone looking to buy the dip might prefer to see the numbers from the big tech names that make up the FAMANGs before jumping in with both feet.
And finally, there is the state of the market itself. Since just about everyone in the game uses chart analysis these days and that the recent joyride to the upside had gotten a little out of hand, I think it is a safe bet that traders might want to see if the current pullback gains traction.
For example, the current decline - if you can call it that - stands at less than 1.75% on the S&P 500. And a run-of-the-mill Fibonacci retracement of 25% of the August through January run comes in at 2760. So, the fast-money may be waiting and watching to seek if the bears have enough mojo to get such a retracement started.
On that note, a run down to the 2750 zone wouldn't really do much damage to the overall technical picture. Heck, the 50-day on the S&P is down around 2700 and a test of that level wouldn't even represent a "lower low" on the charts. So, one could argue that the bears definitely have some room to work here while the bulls rest up.
While anything can happen in this market and trends can, and often do, change at the drop of a hat, I of the mind that the jury is still out on whether we will see yet another quick, V-Bottom, or a more meaningful pause in the current bull run. So, for now, it might be best to wait and watch for a while longer.
Thought For The Day:
Unlike training the body, when it comes to training the mind, there is no limit to how far we can go. -Dali Lama
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
Serving Financial Advisors since 1989
Serving individual investors since 1980
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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None
Note that positions may change at any time.
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 constitutes a solicitation to purchase or sell securities or any investment program.
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