Wednesday, August 10, 2011

The Bounceback

Man, there is nothing better than times like this on Wall Street. Honestly, if you can keep your wits about you and you're not too overinvested in the market, and you have some solid finance knowledge to feel empowered to have a good sense of what's really going on, these unbelievably volatile days are the rarest of treats. And if you're actively involved in the market, you learn to appreciate them, of course the huge up days like today's 5% bounceback rally, but even the massive selloffs like we've seen over the past week. If you know what you're doing, those down days are some of the most exciting times there are, because there are any number of ways to profit from steep market declines, and especially because you get to go bargain hunting for those stocks you've had your eye on for 18 months just waiting for the right entry point.

Tuesday's trading action was simply a spectacle to behold. We opened up like 200 points on the Dow after the clear overreaction of what, 1200 points lost over three trading sessions on Wall Street, but within half an hour the bears had mounted their push, weighing stocks down and pushing the major indices down into negative territory within the first half hour of trading. But just when it looked like the bottom was ready to fall out of the market again, the bulls made their recovery, bouncing the indices off of the flat line and sending stocks solidly higher once again as the bears' early morning push was successfully fended off by those who saw too much value in stocks at Dow 10,800 to sit by without jumping in.

The Dow stayed up 150-250 points or so through the midday in New York, but then as we approached the Fed's FOMC announcement out of Washington, DC at 2:15pm, investors pulled in the reins a bit, perhaps anticipating that there were likely no magic words the Fed statement could include that would quickly address the myriad problems facing the U.S. and global economy at this stage. Within minutes of the Fed's announcement, which I linked to here almost immediately, people very easily saw exactly what the Fed was saying, given that this was one of the shortest and most transparent and straightforward Fed announcements I can ever recall seeing, and it basically included (1) a statement that the economy is clearly much worse than they had expected it would be earlier this year, and (2) a promise to keep short-term interest rates -- which have been at zero since the financial crisis in 2008 -- remaining at zero for at least another two years. This was the first time any extended time period like this has ever been included with this kind of specificity in a regular FOMC announcement, but at the same time, the Fed's obvious fear about the current path of the economy, combined with their lack of any real bullets left in their fiscal policy gun, and absolutely no promise, indication or scintilla of evidence of any intention to launch a third round of quantitative easing or other Fed balance sheet action, made the FOMC statement truly one of the most depressing and pessimistic proclamations I can ever recall being made by the U.S. central bank.

The moment that the bears saw how objectively negative the FOMC statement was, they immediately seized back control of the markets, pushing the Dow from up 200 points to down 200 points within half an hour of the Fed's release to the market's lows of the day, and it seemed we were looking once again at another complete washout as the Dow tested the 10,600 level for the first time in some ten months. It was an extremely impressive push by the bears, who have finally firmly wrested control of this market over the past week or two after basically two and a half years of nonstop bull market action, and the market-savvy could tell that the sellers had decided this was their moment, their chance to really make a splash and cause a scare among the investors of the world. In ten minutes the Dow would be down 500 points again, and there was finally going to be some raw old-fashioned panic again in the markets.

Yep, the bears gave it their best shot at around 2:45pm ET today, buoyed by a shockingly negative and poorly thought-out announcement out of the Fed, but then a strange thing happened. 10,600 proved to be the breaking point for the bulls, and when that level was reached about 15 minutes before 3pm on Tuesday, everything suddenly turned on a dime, and the most massive onslaught of buying I've seen in at least two and a half years took hold, sending the Dow from down 200 to up 430 points, closing at the highs of the day as the market shot up more than 600 points in just the final hour of trading. 600 points up in one hour, just when the bears thought they were about to wring out another day of heavy losses from U.S. investors. Even over the past week's crazy action minute-to-minute, I have not seen volatility like this -- with two huge pushes by the bears of multiple hundreds of Dow points each, combined with a truly epic FOMC fail by historical standards who all but proclaimed that growth will stink in the U.S. for at least another two years -- again since those crazy days in late 2008 when we would be down 700 three days in a week, and then up 550 the next.

The uneducated, the naive, and those who want to appear like they know what they're talking about but who actually have not a frigging clue posted headlines all afternoon and evening on Tuesday like "Investors Cheer Fed No-Exit Announcement" and "Stocks Soar as Fed Announcement Interpreted as Long-Term Support", etc. What jokers. As I've said, the Fed announcement was, factually speaking, about as negative as it could realistically have been. I can't even believe how poorly conceived that statement out of the FOMC was, almost as if it was designed to send the markets into another tailspin, which is exactly what it did within seconds of hitting the wires. There's just no debating that. If you read people in other finance outlets tonight telling you that investors interpreted the Fed decision as an implicit promise to launch another round of quantitative easing, then please don't read that publication anymore because that writer is a fraud and is as naive as the person who bought in big right before last Wednesday's action and then sold everything at this past Monday's close. The Fed has been perfectly clear in several recent FOMC statements when it is planning or expecting to launch more balance sheet measures to support the U.S. economy. They are crystal clear about it on purpose, because it is important to them that investors get the message that the Fed is here to support them. This FOMC statement was simply completely devoid of any such references or inferences, a fact which stuck out like a sore thumb.

Similarly, if you read one of these so-called market intelligence websites or newsletters today that has the audacity to actually put into print that investors bought up U.S. stocks on Tuesday because of the Fed's long-term promise regarding interest rates, once again that person's opinion is not worth the paper it is written on. Seriously, think how ridiculous that is! The Fed has already held interest rates at zero for over two years straight, and anybody who thought at this point, with the Fed's effort having failed to stimulate any real growth for nine straight quarters now, that there was any chance of any time soon seeing the Fed kicking up interest rates is as clueless as the day is long. No, it was already stone cold obvious that the Fed would be holding rates at zero for the foreseeable future, and a promise to do so "until 2013" is barely more than a statement of intent, as clearly the FOMC could act long before then if there is some sustained turnaround in the country's economy and/or inflation rates long before then. The 2013 rate commitment is a red herring plain and simple, and if anything as I mentioned above will surely come to be interpreted by the market as a clear indication of the Fed's expectation that growth will remain very sluggish in the U.S. until at least that time, an unprecedented type of statement out of almost any government office and in particular the FOMC. Anybody who thinks the market went up on Tuesday because of that FOMC statement simply does not have sufficient experience in the market to really know what's going on.

The market rallied ferociously in the final hour of trading Tuesday, but it did so directly in spite of the FOMC, not as a result of it. The Fed did about as much as it realistically could have to scare the crap out of U.S. investors for some inexplicable reason, and when the market had a few minutes to digest the FOMC statement, that is exactly what happened. The market didn't turn positive at all because of the Fed, make no mistake about it. The market turned at 2:45pm today because it had fallen much too far much too fast, and when the bears mounted their great big push, they went too far and made stocks too cheap for the money on the sidelines to stay away. The result was a massive wave of pent-up buying, one that completely overwhelmed the bears as it should have after the carnage we have seen over the past four trading sessions. But make no mistake, that rally was purely a momentum play and nothing more.

And that means that, without actually feeling any support from the Fed after the FOMC statement this week, the huge Tuesday rally cannot be trusted to hold at this point in time.

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Blogger Astin said...

Typical bear market rally yesterday, as shown by today's movement.

The cries from the bulls is that corporate performance will bring stocks up. That's adorable since the numbers that are always trumpeted as great are usually well below past highs.

Plus, almost ALL growth in the past 3 years has come from government support and "stimulus". There is no private sector support or real-world purchasing going on. You can't expect commercial growth without jobs.

The question is if the market finally accepts the reality that's been around for a decade now, or keeps fooling itself into more false "recovery".

2:38 AM  

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