Wednesday, April 30, 2008

State of the Market - 4/30/08

Better than expected GDP and ADP employment reports caused a higher open this morning for the markets, and momentum continued throughout the morning, as all indices posted medium-sized gains and held them through the lunch hour. When the Fed report hit around 2:15, all of that changed, as the market rocketed upward, then downward, then upward, and then finally downward as stocks started selling off around 2:30. The downward momentum continued into the close, when only a late bounce saved stocks from closing at their lows for the day. Volume appears to be higher, and if so would probably count as another distribution day on the total count after the Dow and S&P added one yesterday. That will give each of those indexes four distributions days, while the Nasdaq has two. Certainly not what you want to see if you are a bull. I will remind you though what I said yesterday – it often takes several days to determine the true market reaction to a rate decision, so I am not ready to be a growling bear yet. If we more distribution tomorrow and into Friday, then yeah, I will start reassessing my stance on the market. Until that happens, I am willing to give the market the benefit of the doubt.

Here is a brief summary of the actual Fed statement that seems to drive so much of trading on these days:

“In announcing its decision, the U.S. central bank pointed to the "substantial" reductions it has already put in place and noted that energy and other commodity prices were on the rise. It also dropped a reference contained in its last interest-rate announcement that "downside risks to growth remain."

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the central bank said.

While the Fed said uncertainty on the outlook for prices remained high, it also said it still believed inflation would moderate over time, which some analysts saw as suggesting the possibility rates could move lower. Two Fed officials dissented from the decision to cut rates, preferring no change.”

The part in bold is what worries me a bit. Here’s part of the actual Fed statement regarding what they expect inflation-wise.

"Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months," the Fed's statement said. "The committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."

I don’t see much in there that tells me they care deeply about helping the average American and fighting inflation, but I am not an expert. Maybe someone can help me out here. The part where they say “inflation will moderate” is what scares me the most. How do they really expect inflation to moderate over the coming quarters? What is exactly going to cause this happen? I really don’t know, but that is why I am a bit worried and one possible reason the market didn’t rally on first look of the statement. My guess is what the market wanted to hear is that the Fed will start fighting inflation and either hold rates steady or raise rates over the coming few months. Right now, the consumer is hurting mightily and until these energy and food prices come under control, I don’t know how the economy can improve. Maybe that’s just what I wanted to hear. We’ll see where the Fed goes from here. They seemed to leave the possibility of more rate cuts in the future open, and if that tool is still out there, I fear they will continue to use it to help the banks and brokers, instead of consumers and taxpayers.

I am still planning on not trading tomorrow or until the market tells me it wants to go higher, but based on individual stocks, I saw some very good things happening today. There were several IBD-type stocks that broke out today on higher volume, and if the market was a little more lucid here and if the Fed decision wasn’t on our plates, I would be jumping on several of these. Check out CYBS, MPWR, CSIQ, OTEX, GFA, AMED, VIV, and SPW. The thing I like is that many of these breakouts were earnings related, and that is one less thing you would need to worry about if entering these stocks. If we have more days like today where newer individual stocks breakout out of nice patterns, I would be much more bullish on this overall market. As it is, I will still remain patient due to the likely volatility of the next day or so, but these stocks will be on the top of my watchlist.

I will be back later with some charts setting up and some of the charts that put in nice moves today. Perhaps tomorrow we will reverse the afternoon reversal and head higher. With the amount of short interest out there and the fact that we are right at resistance, a breakout here could turn into a very nice move higher for the market. Then again, perhaps we head lower still with the month of May beginning. I have no idea and am preparing for either outcome. We shall see what tomorrow brings. Until then, best of luck and be careful.

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