The market has staged strong back-to-back rallies ahead of the FOMC. Everyone is trying to guess what Ben Bernanke is going to say after the release. Personally, I believe the rhetoric will stay the same.
Last month, the Fed Chairman said that they will taper if economic conditions improve. Unfortunately, we haven’t reached that point and quantitative easing will continue in the foreseeable future. That means the current policy will remain in place for at least a few months.
The reaction four weeks ago was negative. That initial shock could be wearing off and identical language this time around could produce a rally. I am not going to second-guess the market’s reaction. From my standpoint, this is all noise.
Economic conditions are not going to improve this summer and the market won’t make a new high until they do. Unemployment in the EU is 12.2% and they are in their sixth consecutive quarter of negative growth. China’s numbers are slipping and their government does not plan to stimulate. This morning, FedEx said that conditions in Asia are slow and they are cutting routes. Domestic activity will be hampered by fiscal spending cuts.
Regardless of the reaction to the FOMC, I believe overnight flash PMI’s could present a problem. The focus will shift from central bank money printing to economic activity.
The market will embrace rising interest rates if they are accompanied by economic growth. It might take a few months, but this would be a healthy condition. Sooner or later, the training wheels have to come off.
Given my forecast for sluggish growth this summer, I believe the market will be trapped in a range. Asset Managers will not chase near the all-time high, but they will buy dips around the 50-day moving average. Dismal economic activity and the threat of rising interest rates will spark profit taking near the all-time high and resistance will build. Strong support + strong resistance = trading range.
As we approach the upper end of the range, I am more interested in shorting this move. I am not bearish, I just feel that resistance is strong and good news is priced in.
Don’t trade the FOMC release. Wait for Ben Bernanke’s statements and wait for the direction to be established. If I see late day selling, I will buy puts. If the market closes below SPY $164, I will add to the position. I hope to get short ahead of the flash PMI’s, but I am not going to force a trade.
Remember that these moves are just noise. Earlier in the week the market rallied and sold off on columns posted in the Wall Street Journal and the Financial Times (ridiculous). In this environment you need to enter positions and set stops/targets. Directional moves will only last two or three days and there won’t be much follow-through.
Let the FOMC move run its course and wait for Ben Bernanke’s comments. He will set the direction. I will get short or stay sidelined – I will not buy into a rally.