Thursday, March 16, 2017

Rally Already Fading

All the buyers that waited to buy after the Fed hike was announced after Yellen was less hawkish than expected are sitting on losses.  That is why you don't overreact to a Fed rate decision.  Yellen was her usual ambiguous self, learning her lesson after her March 2014 press conference experience where an off the cuff remark about timing caused the bond market to have a mini panic.

The best times to buy for the Fed is the day ahead of the meeting, and to sell at the open the day after.  This is just experience, there really isn't a good explanation, other than you have a subset of traders that will always go to cash ahead of a Fed announcement and buy afterwards.  That is why you saw a feared event, a forecasted rate hike, turn into a buy the news event, as stocks, bonds, and gold all went up together, with the dollar going down.

Haven't we learned our lesson by now, after 8 years of mealy mouth commentary from the Fed?  They have vastly different thresholds for easing and raising.  It takes a lot of good news to raise, and not that much bad news to ease.  For them to have a hawkish hike, it would require the S&P to be in a full blown bubble, not just a small bubble.  It would require nonfarm payrolls and CPI to go through the roof, and that just isn't likely in this economy.

The best strategy going into a Fed announcement is to expect them to be more dovish than expected, especially if it is a press conference meeting.  The markets are always eager for the Fed to hike rates, to do something, to stop being so easy, but you can't change the animals stripes.  They are born to pump, and it requires a lot for them to stop pumping.  Their default setting is to let bubbles grow until they get so big that the market begs them to hike, just as it did a few months ago after the post election rally.

This market is due for a deeper pullback, and the setup is there ahead of the French elections.  That is all you will be hearing about in April.  2300 is very possible by April.  If I wasn't long bonds, I would probably be short stocks.  They are sort of redundant positions, so unless the SPX can get closer towards 2400, I will sit back and wait.  If we can get back towards today's highs (around 2390) within the next few trading days, I will probably short it.

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