They Announced, They Cut, We Yawned.
Those looking for a rate cut to stimulate the market in either direction are still twiddling their thumbs. Today's market response was uncharacteristically different from those in the past. Recall that in the past, a selloff generally followed the rate cuts. Today's response in contrast was initially positive, but selling ensued in the final hour of trading.
Just what was it in the news today that did NOT excite investors? Unless you have just returned from a one-person expedition on foot to the South Pole, you knew that the Fed was likely to cut interest rates again today. While the FOMC meeting produced a 50 bp rate cut to 4.0% (as most expected) and the bias remained tilted toward economic weakness, the reason cited for the Fed action is that capital expenditures are still declining and inflation is no threat.
"Oh, I get it. Cheaper rates means businesses and consumers will buy more, and profits will rise. Let us buy something!" The markets rose.
"But wait. Still tilted toward weakness with declining capital expenditures means the economy is headed south. Better sell!" The markets fell.
In the end, the Dow fell a measly four points, the NASDAQ 100 eked out two points, and the S&P 500 remained unchanged. Flat, flat, flat. Not much there for bulls or bears to cheer about, and volume continued its recent weakness too with just over 1 bln shares on the NYSE and just under 1.7 bln shares on the NASDAQ.
Careful though, still waters run deep. One thing particularly absent from the announcement was the usual bit about "monitoring events closely" (and thus the UN-likelihood of another intra-meeting rate cut prior to the next FOMC meeting on June 26-27).
Neither was there anything about the Fed seeing any positive turns in the economy, nor was there any mention about any concern for inflation. The message squarely focused on reduced capex spending and a slowing economy.
I am not just guessing at the next part - it follows then that the consumer spending will be the next to fall in coming quarters (disappointments from Wal-mart and Zales, both the low and high end of the retail market suggest that too) and that spells further and longer lasting weakness than was anticipated just one quarter ago.
As Scott McNealy, Sun's Chairman, has tersely noted, "If analysts did not see the cliff coming, what makes them so sure we have hit bottom?" Good question. Personally, I do not think we have and would look for more weakness ahead. There is certainly no reason for the market to rise based on anybody seeing light at the end of the tunnel. . .
. . .That is unless you are Applied Material (AMAT). It reported results a penny worse than estimates with sales off nearly 13% from a year ago. Presumably, it did not see that coming. It also noted that this was the "steepest and sharpest [downturn] in memory", yet also noted that it "feels it is in the bottom of the cycle." I do not know how they profess to know that since the Fed, by its omission of comment, thinks otherwise. See McNealy comment above.
The theme remains the same - indecision. You have heard the old saying, "never short a dull market". Probably good advice in front of the Fed meeting despite the oscillators headed south. Well, the oscillators are still headed south, but now the meeting is over and the news is out. That would typically have investors and traders selling the news, and maybe they will. But the low volume and relatively little change in today's markets paints a picture that markets may glide down rather than sink like a stone. It does not yet look like the mother of all shorting opportunities that we are looking for despite the negative fundamental picture.
Let us go to the charts for a bit more detail.
Dow Industrial (INDU) chart:
Hmmm. Not as simple as I thought. All oscillators except the 30-min stochastic say to get short or buy puts. Yet the daily candles are holding support as the stochastic falls. Sure the daily chart says bearish divergence is at hand, but prices have not fallen in relation to the oscillators. While the bigger cue may come from the weekly chart suggesting a rollover following a meteoric rise, the other charts are less than clear. The good news is that the 5/10-min charts did provide an excellent day trade opportunity on the DJX and should continue to do so in this expiration week.
NASDAQ-100 chart (QQQ as proxy):
QQQ too is showing daily oscillators in decline, yet support held again just over $43. Even daytrading has been tough except for the easy pickings on puts following the Fed's announcement today. Easy? Maybe not. On the 5/10 min charts (not shown), the opportunity was there, but I stood aside concerned at the immediate strength in the breakout over $45.50 to over $46 on heavy volume. Sure it rolled over, but the QQQ had lost $0.50 back to support by the time I figured that out. I though an entry then would make me late to the party and likely to grab the bottom. In retrospect, this was a no-brainer that I let get away out of analysis paralysis. However, based on the bounce from support and off the lower daily Bollinger band, there is even the possibility of a move back up. It is not so much a presence of strength though, but rather an absence of weakness. Oscillators say go short, but candles are not convincing. Anybody want to flip a coin?
S&P 500 chart (SPX):
Again, though oscillators are pointed down, but downward candle movement has been minimal a tough to profit from, except for the day traders. Sure there is bearish divergence on the daily chart and highs have been getting lower, but support has held so far. With the Fed meeting out of the way for six weeks and earnings practically over, there may not be much to support prices going forward and support could fall, especially as we note on the weekly chart the weakness at the 20-pma. But so far, bearish traction has been limited. Will it slip tomorrow? That is the $64,000 question. We know one thing for sure; block trades were noticeably absent following the announcement - neither the bulls nor the bears made any commitment based on today's action. We would have expected large trades in either direction following the announcement, but the absence of puts or calls tells us that pros are as noncommittal as we are.
VIX? Inconsequential at 27.34, it has traded within a 2-point range for the last week. Closing support is at 27. It could go either way, but will do so only as a reflection of investors' changing sentiment. It will follow, but not lead, and we will not rely on it tonight.
As for tomorrow, today's lack of follow thorough in either direction with a relative lack of volume on such an anticipated event makes even a hunch difficult to muster. However, if someone had a gun to my head, I would pick more southerly movement on the theory that the news is out, fundamentals are weak, and especially that oscillators are rolling over. I believe it is just a matter of time before the candles follow suit no matter how much strength and holding power bulls have had to this day.
As for earnings related stocks moving the market, they will likely have little effect. SCMR disappointed, which may affect optical and networking sectors, but AMAT's call was perceived as positive as management has convinced investors that the bottom is here. Accordingly, investors were willing to overlook the downward guidance for next quarter and focus with rose-colored lenses on Q3. Amazing but true, bulls are in denial, but bears are in denial of the persistence of bulls. The morning sentiment will have to guide us then.
See you at the bell!