‘Bad News’ Is Now Bad Again…So What Does That Mean For the Upcoming Earnings Season?
The Fed cut rates by a quarter point
today. They also released a statement explaining the cut and their
views on the economy.
"Recent signs point to a firming in spending, markedly
improved financial conditions and labor and product markets that are
stabilizing," the Fed said
in its statement. “Nonetheless, the economy has yet to exhibit sustainable
growth. With inflationary expectations subdued, a slightly more expansive
monetary policy would add further support for an economy which it expects to
improve over time.
The market didn’t like it. Stocks sold off almost
immediately, and after a brief bounce, they resumed the selling all the way to
the closing bell. I believe the main reason for this was not the size of the
cut, but the statement. It wasn’t nearly strong enough for the market’s tastes.
I also believe the market is
throwing up some caution flags right now. First of all, its reaction to the
news today is somewhat concerning. If the Fed had done the same thing four
weeks ago, the market probably would have either viewed it as positive, or
shrugged it off and continued higher. The mood is beginning to change. “Bad
news†is no longer being ignored. This bears watching as we enter earnings
season in the next couple of weeks.
Another big concern I have is
the weakened numbers we are seeing of new highs vs. new lows. Last night the
number of new stocks on Mark Boucher’s Bottom RS and ER Lows list exceeded the
stocks on Boucher’s Top RS and ER Highs list. A friend of mine pointed out to
me that this is the 1st time this has happened in months. Without a
fresh supply of quality stocks breaking out to new highs, it will be very
difficult for the market to make a lot of headway.
My best guess right now is
that we have entered the first true consolidation/correction period since
mid-March to mid-April. I have no way of gauging how long or severe this
consolidation may be. I would recommend applying an extra layer of caution to
trades at this point, though.
If I get further confirmation
that, as I suspect, the market’s tone is changing, I will post another
Working/Not Working Indicator column.
In Monday’s column, I
discussed viewing market moving news events like today’s rate cut as a “2nd
openingâ€. To better illustrate how you might have done this I included some
charts:
This is a
5-minute chart of the SPY as it actually looked.
Below, I’ve whited out the long, red candlestick that formed when the
announcement was made. The “new day†starts with the following bar. I’ve also
noted on the chart a few ways in which you could have played this “morning
tradingâ€.
As I
discussed, early morning strategies may also be used intraday if the market
reacts violently (in either direction) to significant news released during
market hours.
Best wishes for a strong finish
to the month.
Until Monday,
Rob Hanna