Popular wisdom is that the stock market needs quantitative easing (QE) to continue in order to continue moving higher. When minutes from the Federal Reserve’s September meeting were released, traders learned that the decision to continue buying $85 billion worth of bonds every month was a close call. Although they voted to continue the purchases, most of the members believed they could start cutting back on purchases later this year and end the easing program completely by the middle of 2014.
After the release of this news, stock prices rose.
Since the last Fed meeting, analysts have been explaining that the market is vulnerable to a selloff when QE ends. Yet on the day we learned that QE’s days could be numbered, prices moved up defying conventional wisdom.
Intraday prices had actually bottomed about two hours before the Fed minutes were released. Rather than moving the markets, news often does little more than provide fodder for analysts. It is important to remember that in the short-term, we profit from price action more than news and prices tend to exhibit mean-reversion behavior in the short-term. Stocks were oversold with SPDR S&P 500 (NYSE: SPY) down more than 2% in the first two days of the week. A rebound after becoming oversold is expected and that was what we saw yesterday.
There could be some follow through to the upside today. SPY remains slightly oversold with RSI(2) at 17.15. RSI(2) is the Relative Strength Index calculated with only the last two closing prices.
LRN was down on news and the company warned that operating results would be below expectations. Even though the stock is oversold, downward pressure could continue as investors reconsider the company’s prospects. The second stock on the list, CLVS, could be a better trading opportunity.
BIL has traded within a range of less than 0.1% for the past year and is unlikely to provide a significant profit to traders. The second ETF on the list, MLPI, could be a better trading opportunity.
Short-Term Trading Opportunities
PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter these trades with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
XBI is down about 11% in the first three days of the week and is deeply oversold. It is one of the ETFs highlighted above as due for a bounce based on ConnorsRSI and RSI(2), the RSI calculated with data from only the last two days, is at 1.31. XBI holds more than 50 different biotech companies. Several biotechs have fallen sharply on bad news this week but many are down in sympathy. XBI could benefit from a rebound in the sector and is offering buy signals on PowerRatings, ConnorsRSI and RSI(2).
All data is as of the end of day on 10/09/2013.