Commentary:
The Fed spoke and the market listened! Though the major indices traded in a narrow, sideways range throughout the morning session, stocks immediately rocketed higher after the Federal Reserve Board hinted at a possible easing of economic policy going forward. The Nasdaq Composite led the way with its 2.0% gain, while the S&P 500 and Dow Jones Industrial Average notched equally impressive gains of 1.7% and 1.3% respectively. The small-cap Russell 2000 surged 1.8% higher and the S&P Midcap 400 advanced 1.4%. Each of the major indices closed near their intraday highs.
Higher turnover across the board finally confirmed the market’s gains, breaking the pattern of declining volume on every “up” day. Total volume in the NYSE increased by 12%, while the Nasdaq volume came in 26% above the previous day’s level. Both exchanges registered an “accumulation day” that was clearly indicative of institutional buying. Advancing volume in the NYSE blew away declining volume by a margin of 11 to 1! The Nasdaq ratio was also quite positive at nearly 7 to 1.
Fed days are a lot like earnings announcements on individual stocks, only the reaction occurs intraday instead of overnight. No matter how well one might know a company’s fundamentals, the actual reaction to the quarterly earnings releases are difficult to predict. Worse is that high probability chart patterns are often ignored when a stock is reacting to big news such as earnings. Unfortunately, technical analysis also gets thrown out the window on Fed days. Despite the S&P, Nasdaq, and Dow facing a plethora of resistance levels going into the day, the aggressive post-Fed buying spree paid no attention to the technicals. Both the S&P and Nasdaq violently broke out above their 20-day MAs, 50-day MAs, and prior highs from March. The Dow was the only index that closed below its 50-day MA, although it is still well above its prior high from March 12.
With the major indices bumping into key resistance levels from a low-volume rally, we figured yesterday’s Fed meeting would provide the perfect excuse for institutions to resume their selling activities. Obviously, we just plain figured wrong! We stopped out of nearly all our short positions and sustained losses in the process, but the important thing is that we simply maintained the discipline to follow our plan. This newsletter has maintained a consistent long-term record of profitability on our ETF trades since inception, but that doesn’t mean there haven’t been bumps along the way. Yesterday was one such bump. Although it hurt a bit, taking the bad with the good is part of the business. We also know that consistently following our plan, regardless of market conditions, is the only way to generate steady profits year after year.
Now that stocks have followed through on their reversals off the March lows, aggressive short selling is probably a bad plan of action. Conversely, it may be risky to buy heavily at current levels without first seeing if yesterday’s Fed bonanza was merely an unsustainable knee-jerk reaction. If the market consolidates near yesterday’s highs for the next two to three days or retraces only modestly, we will begin looking for new buying opportunities next week. If stocks can prove that yesterday’s action was not just an aberration, we will certainly respect and participate in the bullishness. But until then, take it easy with new trade entries and don’t attempt to quickly recover any substantial losses you might have sustained by “revenge trading.”
Today’s Watchlist:
As per the above commentary, we want to avoid new trade entries for the next couple of days until the market confirms yesterday’s action was not just a knee-jerk reaction to the Fed meeting.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
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Open positions (coming into today):
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IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (2.07), unrealized P/L = ($569)
Closed positions (since last report):
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TWM long (125 shares from March 20 re-entry – bought 69.28, sold 67.86, points = (1.42), net P/L = ($178)
SDS long (400 shares – 300 from March 1 entry , 100 added on March 7) – bought 60.51 (avg.), sold 58.85, points = (1.66), net P/L = ($672)
RTH short (300 shares from March 19 entry) –
sold short 100.61, covered 102.98, points = (2.37), net P/L = ($717)
Current equity exposure ($100,000 max. buying power):
- $24,150
Notes:
Not surprisingly, all but one of our short positions stopped out. Yesterday was certainly not much fun for traders who, quite logically, were holding short positions into major resistance levels. Nevertheless, we followed our plan and it simply didn’t work this time. Playing the odds for consistent profitability over the long-term has always been our primary objective, but occasionally hitting a string of losing trades in the short-term is an inevitable part of the trading business. Time to move on to the next profitable opportunities. . .
Edited by Deron Wagner,
MTG Founder and
Head Trader