Good News Priced In For FOMC. Flash PMIs Could Be An Issue On Thurs.

June 17, 2013

The market has been chopping back and forth the last few weeks. This is a normal consolidation phase and I am not reading too much into the moves. The S&P 500 gapped 19 points higher this morning and there wasn’t any news to justify the rally.

Supposedly, traders believe Ben Bernanke will tone down the tapering message when he speaks after the FOMC meeting this week. He will supposedly try to avoid a market decline similar to the one we’ve seen in Japan during the last few weeks. If this is the rationale behind today’s rally, we are setting up for a “sell the news” event.

I am not buying into any of the “stories” during this consolidation phase. The market has rallied 25% in the last year and it needs to take a breather. It’s just that simple.

The Fed said that they will taper if economic conditions improve and they will remain accommodative if conditions continue on the current sluggish path. This course of action makes sense and I don’t believe the rhetoric will change.

The Fed knows that it has done everything it can. Quantitative easing is not stimulating economic growth and the recovery will have to stand on its own 2 feet.

In the last 10 months the focus has been on central bank money printing. They have reduced credit risk and they have suppressed interest rates. In this “risk on” environment, stocks are attractively valued. Revenues are flat, but cash flows are strong. Companies are lean and mean and any uptick in demand will go straight to the bottom line.

The market can tread water in this environment. However, I don’t believe it will move higher without economic growth. Asset Managers will not chase stocks at this level. They will wait for signs of improvement. If the market tanks, they will buy dips.

Europe’s economic activity is dismal and GDP has been in negative territory for six straight quarters. China’s growth is slipping and GDP projections for 2013 have declined from 8.2% to 7.7%. Over the weekend they tighten real estate transactions and their government does not have any stimulus plans. Some analysts believe that they will not take action unless growth slips to 7%. That is a considerable drop from current levels. Domestic activity will be sluggish because of the sequestration.

We will get “Fed speak” Wednesday afternoon. The market could pull back on the news. Flash PMI’s will be released Thursday morning and that could accelerate the selling. I believe the numbers will be weak.

Remember, all of these wiggles and jiggles are just noise. The market needs to consolidate. It will gather strength and if economic conditions improve, will make a new high this fall even though interest rates will move higher. On the other hand, if economic conditions do not improve the market could face a nasty selloff in September/October.

For the remainder of the summer I believe we will trade between SPY $159 and $168. The bid is strong and Asset Managers will buy near major support. When we run up to the high, profit taking will set in.

In the type of environment I just outlined, you need to be nimble and set targets. We won’t get much follow-through in either direction. Swing trades need to be 2 to 3 days in duration. When you get the move and you hit your targets, get out.

For today, expect quiet trading. We gapped higher right out of the gate and the S&P 500 has been in a two point range ever since. We might be “dead till the Fed”.

If the market gets back above $165, the little downtrend for the last few weeks will be broken. I would prefer to test the downside one more time and establish support at $159. That would give us some volatility and we could avoid the doldrums.

I am more inclined to trade the downside today. This move was very “fluffy” and I don’t trust it. If I see late day selling I will buy puts (small size). If we have a big reversal (unlikely) and we close below $164, I will buy more puts.

I’m not too excited about the long side at this level. If we move higher today I will probably stay on the sidelines.
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