TheSlayer's Market Thoughts

SPY June 26 2013

SPY moved slightly higher on June 26, 2013. The E-mini futures briefly crossed the 1600 level before pulling back. We did not see the insanely strong buying surges of the recent uptrend. Rather, it was a more standard slow grind higher that, as on June 25th, developed fairly late in the day and also suffered a slight pullback at the very end. As usual recently, the overnight futures captured most of the day's gains, with the trading during the day restricted to a tight range. There was enough volatility intraday to do daytrades, though.

Weak GDP numbers in the morning did not phase the market at all, with only momentary selling of the futures. It is worthwhile to ask why, four solid years into a recovery, the numbers are so weak, especially considering the extraordinary lengths to which the Fed has gone to prop up the economy. That's not a political question, it is an economic one - what gives? Those of us who can remember the economic recoveries of the past, say, of the 1980s, can only scratch our heads and wonder what has changed so much in the last few decades that a four-year-old recovery can't manage better than 1.8% GDP growth.

The reaction to the GDP number seemed to be a return to the typical "bad news is good news" interpretation, where bad economic news helps stocks because of the hope that a weak economy will prolong the QE program. The Fed, though, is doing everything it can to discourage that type of thinking. It now is hinting that 7%, not 6.5%, is the magic number for unemployment, which will induces the Fed to taper and eventually end the QE program.

What the Fed doesn't seem to get is that it isn't the actual QE buying that buoys market confidence, it is the reassurance that "daddy Bernanke" is there to backstop the market. That reassurance removes the key element of fear to the downside that has propelled the market higher, giving anxious buyers eyeing a dismal economic recovery the courage to press the buy button without overblown fears we could fall right back to 1200. The Fed is trying to kick that remaining leg of out the stool away, but today's action suggested that nothing short of a blunt "QE is over" will do the trick. Some traders wish the Fed would just shut up and go away and let the market seek its natural level, wondering what the Fed will do just adds an element of uncertainty to things. But there's no question QE brings in buyers - who will be hurt when the Fed changes course, of course.

A megaphone pattern may be developing. If that is the case, we may have more short-term upside before running into true resistance. In the longer term, though, megaphone patterns are considered Bearish. This one could be part of a long-term topping process. We'll see how the market reacts when it hits the upper channel, it's just one of may possibilities.

Below is the E-mini futures 4-hour chart, with a Fibonacci Retracement drawn in. Note that the recent bounce has been V-shaped. This is a standard reactionary formation, V-shaped bottoms are usually not considered long-term foundations. Also, note that today we ran up and touched the 50% Fib line, then backed off. This doesn't mean we can't surge higher - SPY probably will continue and complete the cup - but it is one of those levels that traders obviously were watching. The late surge and subsequent selling were probably a result of alert traders having these levels programmed into their charts and playing them like corner shots in a game of Billiards. You may not believe in the Hocus Pocus of technical analysis, but others do, and the fact that they do does influence intraday moves.

As usual, the market leaves us in an indecisive place. Having recovered 50% of the recent selling, SPY has now completed the follow-up to that move and has a free hand. While some have pointed to the abrupt bounce off the bottom as being simply a dead-cat bounce, others note that it reflects the gradual process of traders regaining their confidence after the recent Bernanke hit on the market. With so many traders scared and now more convinced than ever that the market is just one big house of cards waiting to be blown over, the moves higher from here are likely to be grinds rather than the epic leaps of April and May. That is more standard market action and provides a more secure foundation for future moves, since there aren't as many air pockets that need to be retraced and filled in. It isn't as exciting, but it is less dangerous.

The bottom line is that we are mildly Bullish at this point. A sustained break below 1580 would be Bearish, a move back over 1600 and holding there would be healthy and Bullish for the market, more healthy than a quick dash back to the 1620s.

E-Mini Futures on June 26, 2013, 4-hour chart

SPY June 25 2013

SPY had some mild early weakness, then turned around and did a slow grind higher for the balance of the day. Much of the morning was spent shuttling around in the 1570s, while the afternoon was spent almost exclusively in the 1580s. A pullback ended the proceedings, leaving closing prices very close to those at the open.

It was a digestion day, that is, digesting the recent losses. SPY remained in the downtrend channel, getting a weak technical bounce off the lower channel line. The day's overall pattern formed an indecisive Doji.

Merely because there was no major selling did not make the day Bullish, though not surrendering even more ground was a sort of victory for the Bulls. In this type of volatility, anything can happen from this point. The slow grind higher during the afternoon was not very impressive, and the fact that those gains were lost by the close also was a sign that the sellers remain, biding their time.

Not looking for much for the rest of the week, and not expecting much from window-dressing, either. Some weakness before the July 4 holiday would not be unusual. If this were the chart of a stock, it wouldn't be worth buying. At best, we can play the downward-sloping channel, but in general, this is a market of action/reaction by short-term money rather than a trending market. As such, it is extremely difficult to trade until some theme develops.

SPY June 24 2013

The Bernanke crash continued on June 24, with unabated selling until mid-afternoon, when short-covering and bargain hunting drew buyers. The wild buying at end of day did not feel "organic," but rather that of a technical bounce. SPY hit prices it had not seen since April.

The only thing missing from the market right now is confidence, since the fundamentals are not much different than they were a week or month ago. When mass sentiment takes hold, you get vicious downdrafts like this, but they can dissipate quickly when something reassuring happens as well. Market makers have known this at least as long ago as when Whitney strode confidently across the floor of the exchange with a handful of cash in November 1929. Recent action is nothing like that time, of course, so far this remains simple topping action.

Theoretically, the market should take Fed tapering as a non-issue since it only happens due to a strengthening economy, but that's a fairly naive viewpoint favored by the likes of former Ivy League professors.

The bond market is putting some pressure on the Fed. One of many benefits of QE was to drive down rates, which greatly eased the government's carrying costs for the national debt. As rates skyrocket due to the Fed's careless handling of public confidence, the bond guys are making a statement which is going to affect debt carrying costs and, ultimately, government spending. That's a long-term negative for the economy. But that's far in the future, right now everybody can stick to their guns. The Fed erected a very delicate house of cards which is having some difficulty. Fed Presidents coming out and calling the bond guys names is just, how shall I put this delicately, unseemly.

The Fed's current mania with being "transparent" is completely at odds with the previous 100 years of Fed policy. The old system worked pretty well, skilled professionals working behind the scenes and doing the best they knew how to do. Coming out and saying "We will do X" is all well and good and proper, but coming out and saying "We will do X if Y happens," with Y highly uncertain, is not really telling the market much except that everything is up in the air and that the guys behind the scenes don't have a clue. It creates uncertainty by itself - and the market hates uncertainty, as we have seen the last few days, with the VIX taking off. Sometimes, you need things to just happen when they need to happen based on unassailable facts of the moment based on past actions, without a lot of talk and foreshadowing and public gaming of possibilities in advance, as in a college seminar.

Things are likely to remain volatile for some time, which is not unusual for summers anyway. The congestion area from March provided support today, ultimately the market may settle there for a while. How far down the averages ultimately will drop is anyone's guess, but this only is a 5% correction so far, not much by historical standards. The Nikkei may be telling us something with its recent action. Not worth hazarding any guesses right now, play it day by day. The 1540s are a lot closer now.