Wednesday Reality

Hello? Helllllooooooooooooo? Is there anybody out there?

Where did everybody go who just one day ago was telling you that the market rallied 600 points in an hour on Tuesday afternoon because the Fed pledged long-term support for the market? Boy, that long-term pledge of support sure disappeared in a hurry, didn't it?

Where did everybody go who denied that Tuesday's Fed statement made the FOMC sound overly negative, and overly powerless?

Where did all the talking heads, analysts, and current and former fund managers go who advised you to buy on the dip all day on Monday? Anyone? Anyone? Bueller?

Right back under their rocks is where they went, that's right. Only to re-appear in a month or two and tell you they've predicted this whole move downward all along. But then, that's the shtick that makes any public market analyst survive nowadays, isn't it.

The markets plunged again on Wednesday, erasing all of Tuesday's massive 4% gains in the U.S. and then moving more than a full percent lower than that, bringing the Dow's total five-session tumble to a stunning 1176.50 points, representing a decline in just one week of 9.9% of the full accumulated value over the entire lifetime of the Dow Jones Industrials Average, and I can say from the perspective of a very involved market observer, it has truly been a thing of awe to behold. Even more ominous than the fact that Wednesday saw the markets give back significantly more than all of Tuesday's gains, is the fact that the market sold off hard all throughout the final 90 minutes of trading, and finished Wednesday's abysmal session literally right at the lows of the day.

Make no mistake -- what we're witnessing right now is one of the most impressive momentum struggles between the bulls and the bears that we've had on Wall Street in our lifetimes. Of course the absolute peak of the 2008 financial crisis was even a little worse than what we've endured over the past several trading sessions, but after Wednesday's huge slide, I think it's fair to say that we've officially moved into "historic" territory with this incredible fiasco over the past week in the stock market. It's not quite to "apocalyptic" yet -- in fact, amazingly it's nowhere near "apocalyptic" yet by a longshot -- but in truth, a 10% decline in exactly one week is close to as bad as the whole market at large ever gets. With the situation in Europe seeming to deteriorate almost daily, and with the GDP numbers for the first half of this year finally making clear to Americans for the first time the farce that has been manufactured by the current administration through growing use of government-printed money over the past two years, combined with what I have been telling you was a Fed statement on Tuesday that somehow managed to make the FOMC sound simultaneously as scared and as powerless as I have ever seen them sound, this is far and away the market bears' best opportunity to garner the support they need to force huge downward spikes in the market since the financial crisis finally bottomed out in March of 2009.

It's been two and a half long years for the bears, it really has. Even by bear market standards. The move from Dow 6,600 in March 2009 to Dow 12,810 on April 29, 2011 was one of the single most ferocious bull cycles in the history of the DJIA. Think about that -- the world's leading market index surged a full 94% over the span of just over two years. It was basically impossible to make money shorting stocks, or doing anything other than sitting squarely on the long side in equities, for over 25 months in the U.S. In truth, mostly every bear out there has been pulling his or her hair out for over two years as equities have inexorably risen, seemingly without any valid justification to support such strength, a sentiment expressed by many financial bloggers and other talking heads in the industry repeatedly ever since the market started recovering from the financial crisis.

And now, finally, the confluence of negative events I mentioned above have given the bears their first chance to flex their muscles since March of 2009. And given what the past 25 months have been like on Wall Street, the muscle of the bears can be great indeed, as we saw well back in 2008 and as we're seeing again now in a big way. The bottom line is that these negative guys, and the momentum guys, and the logarithmic trading guys, they all come out of the woodwork in times like this, and they do so in incredible numbers and with incredible strength in their push. We see it every few years like this, even though most market participants seem to be surprised all over again each time the cycle repeats itself. The bulls put up a strong effort around midday on Wednesday after a large opening drop following Tuesday's short-lived rally, bumping up the Dow more than 200 points off the morning lows, but the bears circled the wagons for another sick push in the afternoon, and the final 90 minutes of trading on Wednesday was about as bad as you ever see the markets get. And once it was clear that this selling momentum had started kicking in and that traders were setting their sights on a run at the day's lows, it was like a tidal wave of sell orders flushing over Wall Street.

Given what things look like at this exact moment, the bears' insatiable thirst for blood in the market has clearly not yet been quenched.

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.