What the Fed Did, What the Market Did, and What It All Means

Stock Market Video

What the Fed Did, What the Market Did, and What It All Means

This Week’s Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, Mike Cintolo believes the market is near a critical juncture—the bounce of the past three-plus weeks has recouped about half of the July-August decline, which is typical. The key is what happens from here. Continued strength could produce some buy signals as early as next week, though major weakness would raise the odds of a re-test of the August lows. Mike is preaching patience, and reveals a handful of top growth stocks he believes can lead the way once the market gets going.

What the Fed Did.

The bottom line is that the Fed sat on its hands after its Thursday meeting, leaving interest rates in the 0%–0.25% range they have occupied for seven years, give or take.

In the weeks leading up to the meeting, bookmakers … oops, sorry, I meant to write market analysts … were burning up their keyboards with macro- and micro-analysis of economic indicators, close textual reading of Fed communications and their own predictions about which way the Fed would jump. For investment world prognosticators, it was like the Super Bowl, the Final Four and the World Series, all rolled into one.

The one item from the Fed’s announcement of its delay that has captured investors’ attention is the expression that came after reassurances that risks to the U.S. economic activity and the labor market are “nearly balanced” But the sentence went on to say that the Fed “is monitoring developments abroad.”

It’s clear that the Fed means it’s keeping an eye on the Chinese economy. We know this because the Beige Book—the doorstop data compendium that the Fed uses as a major source of statistical information—nearly doubled its references to China in its latest issue.

What the Market Did

Here’s a chart of the S&P 500 Index that shows trading in 10-minute intervals going back to the middle of Monday. You can almost taste investors’ anticipation as they pushed the S&P higher on Tuesday and Wednesday.

spx daily

When the Big Day arrives, investors continue to push the index higher, then, when the “no-action” announcement comes out the market jerks higher for about 20 minutes, then heads for the basement on high volume, with nearly 70 million shares changing hands in the last 10 minutes of trading.

The enormous downmove represents the market digesting 388 million in overnight sells. Then there’s a small but steady bounce that’s still going on as I write this. Market moves don’t come with little dialogue boxes telling you why things are happening, but it’s pretty reasonable to interpret yesterday’s action like this:

· Fed: We’re not raising rates.”

· Market: “Yippee!” (market goes up for 15 or 20 minutes)

· Fed: Blah, blah, blah … “monitoring developments abroad.”

· Market: “Holy crap, the Fed thinks China could sink the whole ship!” (shares sell off).

This kind of reaction isn’t uncommon. I’ve seen several instances of the market first celebrating a rate cut or a new round of quantitative easing, then realizing that the Fed is actually saying that the economy is so weak that it needs more help.

What It All Means

As a Cabot growth analyst, I’m bound by a semi-sacred oath to refrain from making predictions about what the market will do in the future. When you use a market-trailing timing strategy, the only thing that matters is what has already happened. And this chart will show you that.

This is the S&P 500 daily chart dating back to February. You can see the long, stressful months of dribbling the ball, faking, pulling back, faking a drive, dribbling some more, like a basketball player who just enjoys having the ball, but never shoots.

spx daily

Then comes the over-the-falls move in August and the rising wedge the S&P has built since then. Taken in context, the reaction to the Fed announcement is almost invisible.

As close as I’ll come to a prediction is to say that the market has three courses. It can re-test the August lows, shake out the remaining weak hands and then, with the decks cleared, it can start a new bull move.

The second choice would be for the S&P to just chop along for a while without a decisive move, mimicking its action since February.

The third choice for the market is to make a major move up or down right now. And I’ll go out on a limb and say that I doubt that either of those third choices will occur. The U.S. economy is too strong for a major bear move and the Chinese economy is too weak for a big bull move.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies and Contrary Opinion buttons.

fortune cookie“No matter how smart you are, you’re smarter if you take the easy ways when they are available.” –Daniel C. Dennett – American philosopher, writer, and educator (b.1492)

Mike’s Comment: The market isn’t easy, but it’s not as hard as most make it out to be, either. While the talking heads on TV and online will give you more to listen/read about than you can handle, you’re usually better off taking a simpler approach. Is the market’s trend up? Then be bullish. If not, be cautious. It’s hardest to keep things simplest, but that’s what the best investors do.

Paul’s Comment: When I picked out this week’s Fortune Cookie, I was thinking about investors who insist on looking for winners even when markets are coughing up a hairball. It’s just so much easier to be a great stock picker when the market is on your side. So wait until the market gets going again before you fill up your growth portfolio. (Value investors should just enjoy the bargains!)

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 9/14/15 — Why Apple (AAPL) Is a Bargain

Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor, revels in being a value investor as he details why Apple is now batting cleanup in the lineup for value investors. Stock discussed: Apple (AAPL).

Cabot Wealth Advisory 9/15/15 — What About Disney (DIS)

Cabot Stock of the Month’s Chief Analyst Tim Lutts discusses the elusive state of peace of mind and where it might be found. He also looks at Disney stock, which stumbled recently, and JetBlue, which hasn’t. Stocks discussed: Disney (DIS) and JetBlue (JBLU).

Cabot Wealth Advisory 9/17/15 — Traders’ Take on the Fed Meeting Today

Jacob Mintz, the brains behind Cabot Options Trader and Cabot Options Trader Pro, looks at how options traders were placing (and hedging) their bets before the Fed’s Thursday meeting announcement. He counseled sitting tight, which proved to be a good idea.


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