Taper Tantrums Continue To Dominate Market Action

To the casual observer, the decline of two points on the S&P 500 SPY, 25 points on the DJIA DIA, and a gain of 0.80 points on the NASDAQ Composite QQQ might seem to indicate that it had been a pretty dull day at the corner of Broad and Wall on Wednesday. However, once again, nothing could be farther from the truth.

While the S&P did manage to lose just 2.34 points, or 0.13 percent, by the time the closing bell rang, there were four substantial intraday swings that really told the story of the day as well as what this market is really all about.

Good News Is Bad

Wednesday began with some very good news on the jobs front. ADP reported that private sector job growth in the U.S. economy expanded nicely in November, creating 215,000 new jobs. This was well above the consensus expectations for 175K jobs as well as last month's 184K (which was revised substantially higher from the original reading of 130K). This report came out at 8:15 am EST and before one could open a Diet Coke, the algos were in gear.

Here was the tweet from StateoftheMarkets (@StateDave) in response to the "good" jobs report from ADP:

Boom. Just like that, the action made it clear that good economic news - especially good employment news - was going to be bad for the stock market. As was pointed out in the tweet, the thinking was suddenly very straightforward.

The Game is All About Taper Expectations

The bottom line is the stock market game is (still) all about the Fed and the expectations as to when Bernanke or Yellen might start to taper the QE program. Currently, the expectations are that the Fed won't start cutting back on their bond-buying program until sometime in 2014, with most analyst's money being bet on March as the first "taper."

See also: What to the Cycles Say about December?

So, any better-than expected economic data (especially employment data) that lends credence to the idea that the Fed taper earlier than March is met with selling. And as one might suspect, any news that comes in below expectations in turn supports the idea that the taper won't begin sooner than expected.

Why is good news met with selling, you ask? Because when the Fed starts to pull back on their QE program, there will be less money pumped into the financial system each month. And since it has become clear that a fair amount of the $85 billion that is being created via the Fed each month has been finding its way into the U.S. stock market, well, less QE effectively means less stock buying as well.

Exhibits A - D

In case you are not buying into the idea that it is the expectations about when the Fed will taper that is driving the stock market, please examine Exhibits A, B, C, and D - all from Wednesday's trading.

Exhibit A: Stock futures fell the moment the ADP data was released and the S&P fell nine points in the first three minutes of trading.

Exhibit B: At 10:00 am eastern, the ISM Non-Manufacturing report was released. This data series is designed to indicate the "state" of the services sector in the U.S. economy. Unlike the ADP report, this report came in below expectations.

And what did the algos do with this data? Well, since good economic news is bad, then, of course, bad economic news is good, right? Right. Bam, the S&P moved up fourteen points or +0.78 percent in about twenty minutes.

This tweet summed it up nicely:

You probably don't need the rest of the nitty-gritty details. But suffice it to say that stocks proceeded to move down -1.2 percent and then back up about one percent over the rest of the session. And most of the movement appeared to be tied to, yep, you guessed it; Fed taper expectations.

So, while the two-point move on the S&P may not have looked like much at the close, there was plenty of "taper tantrum" action going on intraday. And, until a new shiny object attracts traders' attention, this will likely be how the game is to be played for a while.

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Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Taper (aka Fed Policy)
      2. The Outlook for Economic Growth
      3. The State of the Bull Market

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Negative
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1780
• Near-Term Resistance Zone(s): 1800-1813

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Neutral
• Price Thrust Indicator: Positive
• Volume Thrust Indicator: Neutral
• Breadth Thrust Indicator: Positive
• Bull/Bear Volume Relationship: Moderately Positive
• Technical Health of 100 Industry Groups: Neutral

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

• Overbought/Oversold Condition: The S&P 500 is neutral from a short-term perspective and remains overbought from an intermediate-term point of view.
• Market Sentiment: Our primary sentiment model remains Negative .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Thought For The Day...

“It is never too late to be what you might have been.” -George Eliot

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Mission Statement

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

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