The sharp downward move in NASDAQ on Tuesday may have been more of a one-time fluke due to the impact of the weather event in the NYC area, but was also perfectly reasonable as part of the consolidation process, where people are trying to discover whether the recent advance has completely run out of steam, or is about to get its second wind to push to a new 1-year high and further. Today is the opposite of yesterday, with enthusiasm over positive earnings reports rather than despair over negative reports. But, nonetheless, the overall context here is the consolidation process.
NASDAQ futures are up sharply, so we can expect a sharp pop at the open, but of course, as usual, it is a coin flip whether people will pile on to extend the opening rally, or whether they will instead sell into any and all rallies. It will be all based on what stance people are taking as to whether the recent advance is really over or is simply consolidating before getting its second wind.
The rally today may or may not be enough to fully erase the deficit from yesterday, but it will still take a few more days to finish the consolidation process in any case and to see confirmation of the short-term trend, one way or the other.
Once again, it is all up to the hedge funds to decide whether they want to continue shifting to more of a risk-on bias or whether and when they want to flip the switch off to go to a risk-off bias and trade the market down in its trading range again. I do think they want to play the market higher, if only to get a better entry price for short positions for their next swing, but they may also attempt some short-term plays, like yesterday, to get better long entry prices before continuing the advance.
The U.S. economy does continue to improve and strengthen, but in an uneven and moderately sluggish manner, which confuses a lot of people, but is a solid positive for true, long-term investors with their eye on the long ball rather than the short game. To me, the short game simply means opportunities to buy on dips.
I bought more Apple (NASDAQ:AAPL) on the dip yesterday, but I am already overly long Apple, so I will have the tough decision to make whether and when to sell my dip purchase on this rally.
BTW, fed funds futures are still pointing to October for liftoff for the Fed, but with a second hike to 0.75% not occurring until January. That is all subject to change as the economy evolves over the coming six months, but right now, that's how people are actually betting and hedging.
-- Jack Krupansky
Disclosure: The author is long AAPL.