The Waiting Game
Last Friday's Non-farm payroll report really caught everybody off guard. The negative number confounded even the most Pollyannaish of economists. This number has had a huge impact in changing the perception of how monetary policy will be conducted in the near-term. The debate has now shifted from whether the Fed should even cut interest rates, to how much of an interest rate cut will be enough to avert a recession and appease the markets.
Admittedly, I expected a bad number -- but not that bad. I also expected the market to rally off a lower-than-expected number, as this would increase the probability that the Fed would be forced to act. Interestingly enough, it took the market a day and a half to come to the same realization.
With Tuesday's sharp advance, most all of the major indices recovered from Friday's knee-jerk sell off. The Nasdaq Composite, (which was prominently highlighted in my last newsletter), continues to outperform, despite all the pessimism. What I find interesting is that the leadership in both the tech and biotech sectors is going on, largely under the radar of most people. All the focus is of course on the quote, "Bad sectors" such as the financials, homebuilders, and retailers. Attention should be placed on these lagging sectors, since without their participation the market cannot be truly healthy.
If you want to look for clues as to what the Fed may do next week, you need not look any further than the Fed funds futures contract. This forward-looking derivative is forecasting a nearly ninety-five percent probability of a quarter-point rate cut and considerably lower odds for a half- point reduction. Therefore, it looks like a quarter-point is baked in the cake, but is this enough of a stimulus to stave off further economic weakness? How will the market react? Of course, nobody knows with any certainty what will happen, but often times, if you engage in keen, objective observation, the market will tip its hand.
Since I've been writing about the Nasdaq so much lately, I've put up a chart of the NQ (Nasdaq 100 e-mini) below, so that readers can see the contrast between this e-mini and the ER2.
I now direct your attention to the fact that the NQ is trading above its 50-day exponential moving average. Conversely, the ER2 is decidedly below the same moving average. What we can also glean from comparing these two charts is a clear divergence in relative strength between the two contracts.
I suspect that this dichotomy has to do with the perception that the technology sector is more greatly influenced by the global economy versus domestic influences. Again, this is something worth keeping an eye on for further hints of market direction.
Turning back to our charts, let's review the short, and intermediate-term time frames of the ER2. Here, we also have a mixed picture. Essentially, we have been in a very wide trading range for about a month now (60 points from peak to trough), while in the 10-minute time frame, the trend is higher for the last day and a half (as seen in the chart below).
In looking at the hourly chart shown below, we can see that we are right up against the big gap that was left after Friday's employment report. I will be watching very closely, to see if the market can fill this vacuum before the Fed announcement next week. It will be very telling if it does.
To summarize: The title of this article says it all - it's "a waiting game". Next week's FOMC meeting is probably one of the most important in over a decade. Helicopter Ben will be walking a tight rope on Sept 18 and I don't envy him for a minute. The markets are screaming for a half-point rate cut and I'm not sure if he'll go that low, but as always, what's of more significance is how the markets react after the decision, not the decision itself.
So until next time, I hope everyone has a profitable week.
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the