David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Just The Way The Game Is Being Played

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There can be no denying that intraday volatility has been “a thing” during the vast majority of 2015’s trading sessions. And while all too often there is nary a catalyst to be found, this was most certainly not the case on Wednesday as traders dealt with a European tank-job, yields rising over 2% on the 10-year, a GDP report that was eye-opening (and not in a good way) and the usual hysterics surrounding the release of the FOMC statement.

Thankfully, investors in the U.S. don’t seem to get too worked up about the goings on in Europe these days. So, there probably isn’t much reason to spend a lot of time fretting about the trouncing seen in the German DAX and France’s CAC40. And the move in the 10-year could be something to take note of – especially if the rise in yield becomes a trend. But in reality, the stories of the day that require our attention included the ginormous miss in GDP and the Fed Statement.

We Knew it Would Be Bad, But…

To be sure, everybody on the planet knew that the rate of growth for U.S. GDP in the first quarter was going to be weak. There was the weather (again), the dollar, the West Coast port strike, and the carnage occurring in the shale industry. And after putting up a relatively crummy 2.2% rate in the last quarter of 2014, analysts were looking for Q1’s GDP to come in around 1.0%.

So, when the report hit the wires that the economy had grown at a measly +0.2% during the January through March period, one couldn’t be blamed for raising an eyebrow. Almost instantly stock futures pulled back and it looked like things might get ugly in a hurry. After all, the annualized rate of 0.2% was the lowest level seen in quite some time and WELL below the estimates.

But before the worry about the economy could start to really roll, the chatter that the report was “so bad that it’s actually good” began. In short, traders couldn’t decide whether to fret about the economy being much worse than expected or to celebrate the idea that the weak data meant the Fed surely wasn’t going to start raising rates any time soon.

Speaking of the Fed

So, with the DJIA down about 165 points during the lunch break in New York, human traders began to realize that the Fed’s ZIRP (zero interest rate policy) and the free money/carry trades associated with said policy might be more important than a crummy economic data point – which everyone had already expected.

Then when the Fed released a statement that was a bit more dovish than had been anticipated, well, those algos seeing the glass as half full went at it. And after the obligatory swings back and forth in the moments after the statement’s release, those red screens actually turned green for a while.

For a little over an hour, the market appeared to like the tone of the FOMC statement. Despite the fact that all references to time and/or the calendar had been removed, the comments about the tough economic conditions being transitory and the new verbiage on the timing of the inevitable rate liftoff seemed to improve the mood.

To the average Joe, the FOMC’s discussion on timing may not hold much meaning. But for those who watch markets closely, each and every change is important. The statement read, “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

In other words, Janet Yellen’s bunch was trying to hammer home the idea that they will not start raising rates until their criteria to do so has been met. And to those worrying that the Fed might want to “talk tough” in order to restore some credibility as an inflation fighter, the new verbiage was clearly a positive.

But In the End…

Unfortunately though, the upbeat mood didn’t last very long. And in the end, the worries about where the economy and earnings might be headed seemed to win out. Or maybe it was the fact that the smallcaps took it on the chin again (are we seeing the beginnings of a momentum meltdown redux?) that caused some concern into the close. But in any event, stocks finished lower and the S&P 500 once again failed to break out of the trading range that began nearly two months ago.

Perhaps the chart below tells the real story here. While there were some pretty big headlines during the session and prices did move up and down a fair amount, at the end of the day, nothing much really changed.

S&P 500 Index – Daily

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The problem however, is that the current market action breeds complacency. Although there has been a fair amount of bad news, stocks are still hanging around the top end of the trading range, which leads to the assumption that the S&P 500 will eventually break on through to the other side and happy days will be here again.

But since “riding the range” has been the theme to this market since the end of November, we probably shouldn’t be too surprised if traders find something negative to latch onto here soon and another trip down toward the lows commences. It’s just the way the game is being played these days.

P.S. I am on the road for the next week and plan to report as time and energy levels permit.

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