Google pressures stocks on open

As expected, the Feds hiked interest
rates for the fourteenth consecutive quarter,
generating the usual post-Fed volatility into the close. After selling off in
the first hour of trading, stocks traded sideways ahead of the afternoon results
of the FOMC meeting. The broad market initially reacted positively to the 2:15
pm announcement, but the bears took control in the final thirty minutes of the
session. The end result was a mixed performance by the major indices, each of
which closed relatively near the flat line. The S&P 500
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Industrials
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2000 gained 0.3% and the mid-cap S&P 400 finished 0.6% higher. Both the Russell
and S&P 400 continued to display strong resiliency, as both indices once again
closed at new record highs. The Nasdaq Composite
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was unchanged.

Volume was pretty light throughout the first half of
yesterday’s session, but surged higher after the quarter-point rate hike was
announced in the afternoon. By day’s end, total volume in the NYSE had risen by
20%, while volume in the Nasdaq was 19% above the previous day’s level. The
losses on higher volume technically resulted in a “distribution day” for the
S&P, but the broad market’s mixed performance did not point to institutional
selling. Furthermore, closing prices of the major indices on a Fed day are often
indicative only of a knee-jerk reaction. The real reaction to yesterday’s FOMC
meeting is likely to come today, after traders and investors have had a chance
to digest the Federal Reserve Board’s commentary.

Although stocks were indecisive and volatile after yesterday
afternoon’s Fed announcement, the real volatility occurred in the after-hours
market. After the close, Internet giant Google (GOOG) reported quarterly
earnings that significantly failed to meet analyst estimates. Because Google has
become such a market leader in the Nasdaq, its closely-watched earnings report
had a very negative effect on the entire broad market. The Nasdaq 100 Index,
which stops trading at 4:00 pm EST, lost only 0.2% yesterday. But QQQQ, the ETF
that mirrors the Nasdaq 100, traded as much as 1.8% below the previous day’s
close in the after-hours market. Like many of the broad-based ETFs, QQQQ can be
electronically traded daily until 6:30 pm EST. The 15-minute intraday chart of
QQQQ below shows the sharp after-hours drop that was triggered by Google’s
report (brighter colored bars show the after-hours activity):

Needless to say, stocks will be under pressure going into
today’s open. However, the good news is that we will finally be able to
determine the true underlying health of the market. Stocks’ mixed signals
throughout the latter half of January made it challenging to determine which
side of the broad market provided the best risk/reward ratio, but the Google
news should force the market to “show its hand.” If overall market sentiment is
truly bullish, traders will blow off Google’s report and use the opening
weakness as a buying opportunity. When the market rallies on bad news, it is a
very reliable indicator of an overall bullish environment. Conversely, traders
may return to today’s session in selling mode because it is quite bearish when a
widely held market leader such as Google misses earnings estimates. Resistance
of the January 19 highs on both the S&P and Nasdaq may further provide a
convenient excuse for traders to dump shares in today’s session. Looking at the
daily charts below, notice how both the S&P 500 and Nasdaq Composite were unable
to rally above their prior highs over the past several days:

Regardless of which way the market goes today, be prepared for
high volatility. Our conservative, mostly-cash position over the past week may
have caused us to miss a bit of the broad market’s recent rally, but our
patience is likely to pay off over the next several days. Rather than managing a
bunch of broad-based ETFs that could easily make a sharp move in either
direction, we now have the luxury of being fully in cash and ready to take
advantage of the stock market’s next clear move. As subscribers were alerted in
real-time, we sold our long position in PGJ (PowerShares China Fund) into
strength for a solid profit yesterday morning. Our ETF portfolio is now 100% in
cash, but ready to strike at the next ETF that presents a clear technical
picture and positive risk/reward ratio.

Open ETF positions: