Hawkish FOMC Comments Are A Sign Of Strength – Dovish Comments Signal Trouble Ahead.

April 30, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market started the day on a weak note. As the morning progressed, support was established and the market worked its way back. In the last hour of trading, nervousness ahead of the FOMC pushed the market lower by a small margin. In today's chart, you can see that during the last two weeks, trading has been directionless. The small-bodied candles indicate that the net change from the open to the close is small. Throughout the trading day, there have been some nice intraday swings. Traders are waiting for something to sink their teeth into and they will get it this afternoon when the Fed makes its decision. The economic releases this morning were generally positive. The GDP came in at .6% which was higher than expected and the Chicago PMI came in at 48.3 which was also better than expected.. The ADP employment index met expectations. High oil prices are starting to weigh on the market and a larger build in oil inventories pushed prices lower. The market would have a sustained rally if oil went below $100. All things considered, the market should be able to hold this rally ahead of the Fed. The Fed is likely to lower rates by .25% and then call it quits. Any hawkish statements could weigh on the market. Some traders believe the Fed will quickly reverse direction and raise rates. I don't believe that interest rates will move higher until September. The Fed will prudently wait to see how the next round of mortgage resets plays out. If the market pulls back, patiently wait for a support level to be established. This will be an excellent buying opportunity and I believe that the Fed will have regained some of its control. In the last few months, they have been at the mercy of the credit crisis and they have thrown the kitchen sink at it. I mentioned that I like heavy equipment companies and they are posting big gains today after solid earnings. They are generating international revenues and they are benefiting from a weak dollar. All eyes will be on the Fed's decision and statements this afternoon. The first reaction to the release is not always valid and traders need to digest the news overnight. Tomorrow, we will see where the market really wants to go. Hawkish statements will create a selloff and dovish statements will generate a rally. Once these initial moves play out, you want to take the other side. I will sit out the moves this afternoon. Any pullback is likely to be swift and shallow and I will aggressively take long positions once support is established. I will also buy into a breakout, however, in small size. As the market approaches SPY 145, the headwinds will mount. By late May, I will shift to a neutral market bias if we are above SPY 140. “Sell in May and go away" will be prudent ahead of mortgage resets. To recap, I am short-term bullish and intermediate-term neutral. On the long side, focus on commodity stocks, heavy equipment and tech (be selective). On the bearish side, favor financials, healthcare and biotech. I will be posting my bullish and bearish picks before the FOMC today. image

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