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NASDAQ Consolidation Continues

Although the FOMC statement contained no new news about the path of monetary policy, it is no surprise that the market treated a non-event as a negative event. Maybe some traders were expecting more than the consensus, or whatever. In any case, it is very typical for the market to over-react to a Fed statement, and I typically need to remind people that it usually takes a couple of days for dust to finally settle and for the market to resume normal trading. A pending Fed statement can slow trading volume as people hold off and wait to see how other people react, and that results in people watching people waiting for themselves to react, which is kind of silly, but that's Wall Street and the mentality of traders.

Fed funds futures as reported by CME Group are still indicating a 60% probability of Fed interest rate liftoff in October, and no second hike until next January, a full year away from now. The odds for September are only 43%, and a mere 14% in June. A Reuters survey from earlier this month had more than half of the 20 primary dealers or treasury debt forecasting June as liftoff. Either way, the Fed isn't raising interest rates in the next few months.

The consolidation process for the recent advance continues. We'll finish it up any day now, but certainly within a week. Even for hedge funds that do intend to push for a new 1-year high, it's also tempting to let stocks fall a bit to get a better entry price.

NASDAQ futures are up modestly, indicating a modest pop at the open, but as we have seen on so many occasions, the opening move is not infrequently a poor indicator of the market's direction for the rest of the day. It's a coin flip whether the hedge funds will hold off and let stocks get cheaper, or whether and when they will flip the switch and jump in with a more risk-on bias to continue the advance.

NASDAQ was showing signs of a capitulation at the end of the day on Wednesday, where the market declined into the close, as if people were throwing in the towel and giving up. That's the kind of sign we look for to tell when a swing is bottoming. In this case it is a consolidation swing within a larger advance swing.

We could see another little bout of anxiety today, especially if the market doesn't take quick enough for ADHD-afflicted traders, but this would most likely be a new bottom for the consolidation, a final buying opportunity before the advance finally resumes its climb towards a new 1-year high for NASDAQ. But... just because this is rational and a higher probability is certainly no guarantee that it will actually happen. Again, it could take a couple more days for this to all play out.

Some of the reactions to specific earnings report are sensible and some are not. In some cases we do indeed see a bit of the traditional "buy the rumor, sell the news" trading pattern of Wall Street traders. This can certainly cause a lot of market volatility, but should not concern true long-term investors, other than to provide them with more buyable dips.

-- Jack Krupansky