So much for the recovery of Tuesday. US Stock prices headed lower once more yesterday, with S&P 500 losing 0.58% and the more bearish Dow 30 0.70% lower. The return of bears yesterday is widely attributed to the FOMC Meeting Minutes, which revealed that many Fed voting members are “comfortable” with a tapering move by end of 2013. This make sense, as an increased likelihood of QE Taper in 2013 will result in less stimulus money pushing equities higher, which most market watchers think are extremely overbought. In fact, the 4-day decline that was only broken on Tuesday was the result of sudden increase in Tapering fears, hence one can simply put 2 and 2 together and come to the conclusion that Stock prices heading lower must be due to the latest FOMC minutes.
However, if we look at the play by play price action, it seems that the situation isn’t so straight forward. S&P 500 prices actually rallied after the Minutes has been released despite dipping lower initially. Prices hit a high of 1,656.6, close to 10 points higher than the 1,648 level when the Minutes was released. This rally was also spotted on Dow 30, and hence suggest that it is market sentiment rather than individual asset idiosyncrasy distorting price actions. Looking at Gold and other USD pairs, the retracement wasn’t as pronounced, with USD ultimately settling stronger at the end of the hour unlike Stock prices which traded lower but ended up higher instead. Treasury Note prices were more straight forward, with prices dipping sharply following the Minutes and pushed lower from there without looking back. Based on the reaction, we can see that Bond traders are rather clear on how to interpret the Minutes, followed by FX Traders, who are a little bit confused with Equities Traders being totally confused as to whether tapering is a good thing or not.
This is not saying that Equities Traders are lesser than their fellow trading brethren, but simply showing that most equities traders may not agree on the long-term impact of QE Tapering. A cut in QE purchases may be bad, but it is akin to weaning off a recovering patient from painkillers. Taking it off may cause slight discomfort, but getting addicted or growing a dependency on painkillers is definitely bad for your long-term health. Equities traders are basically at a loss at which is more important now – short term loss or long-term gain – resulting in the confusing price action yesterday.
S&P 500 Hourly Chart
Well, at least for this round it seems that short-term pain triumphed, as Stock prices did ultimately trade lower. But one wonders if technicals play a large part in the bearish move yesterday. When fundamentals are unclear, technicals tend to be stronger, and it should be noted that yesterday’s rally was stopped just around the known ceiling of this week. Prices was also unable to break the overhead Kumo cleanly, resulted in added bearish pressure just when traders are unable to decide which way to go.
However, when Kumo was broken towards the downside, bearish acceleration resulted in the 1,643 floor breaking, bringing out more technical bears resulting in where we are currently. Stochastic readings are currently Oversold, and considering that there is no clear fundamental mandate, a pullback of some sort may be possible.
Dow 30 Hourly Chart
The same goes for Dow 30 which was unable to break the 15,000 round figure, and hence resulted in strong bearish movement. Similar to S&P 500, Stochastic readings are bullish with readings already crossed the Signal line. However, a full bullish reversal signal is not formed and hence traders should not simply go long from here based on this alone. Furthermore, the overall direction since last week has been down, and therefore a long position here would be considered counter-trend, and require must stronger reasons/conviction to enter.