Stocks were quiet if not slightly weak this morning ahead of the much anticipated Fed announcement, but when Chairman Bernanke announced "Operation Twist", the market dove sharply, with the S&P 500 finishing down nearly 3% Ironically, the announcement (which normally comes at 2:15 pm ET) was delayed for nearly 10 minutes due to a paper jam. When it did come out, it seems the FOMC decided to swap too much paper, or didn't employ its customary printing press tactic.
The merits of "Operation Twist", which harkens back to a supposedly stimulative tactic used 1961 in which the Fed sells shorter-dated treasuries and buys longer-dated ones, are still hotly debated, but the Fed decided to get creative rather than just going straight back to the printing press. The Fed said today it will sell $400 billion of short-dated maturity and buy $400 billion of longer-dated securities, spread out evenly between three different maturities.
Most did not think the Fed would exchange such a large amount, and it seems perhaps many expected something more in tandem. There were three dissenters on the FOMC, which surely did nothing to help the market. The Fed also struck a pessimistic tone, noting "significant downside risks to the economic outlook, including strains in the global financial markets."
Technical Take
Yesterday's push through failures in many stocks and the major indexes gave traders the hint that this oversold bounce had run its course. It felt much like the last few times we had drifted to the upper end of the current range. Yesterday as the market rallied, you surveyed the landscape and there were will a lot of stocks setting up bearish. The strongest stocks dragged the market higher all week, and actually held in well after the Fed announcement today, but couldn't hold on with the intense selling pressure we saw into the close.
The 20+ year treasury bond (TLT) exploded after the Fed announcement and hardly pulled in at all after that, evidence that there was some surprise over the size of the bond swaps. Over the course of the last two months, we have repeatedly seen the credit market be a huge tell for equities, usually in a delayed reaction type of scenario. When the market began to firm up but bonds kept ripping this afternoon, it told us that the selling had not even hardly begun. Once the HFT seemingly subsided immediately post-announcemnt, the real selling ensued.
The weakest sectors, which have been highlighted over the last week in the Off the Charts newsletter (which is still free if you sign up for T3Live), got hit the hardest during the sell-off. The Fed announcement, and rhetoric regarding "saving" Greece turned out to be the ultimate "buy the rumor, sell the news" type event.
The Oil Service ETF (OIH) has been a big tell that the market was not out of the woods, and today it took the plunge out of the tightly formed wedge pattern that the newsletter has been targeting. When it broke the $124-125 level, OIH created a great shorting opportunity.
Molycorp (MCP) was another stock that had weakened and looked poised to break lower out of a wedge earlier this week, and a downgrade from former rare earth bull JP Morgan has ignited a bloodbath. After opening higher today, MCP finished the day down nearly 4%, with the sell-off accelerating into the close. It wouldn't be surprising to see more downside for MCP after one of its biggest supporters, JPM, put it at neutral.
In today's Morning Call, we noted that the banks were another place to turn whenever we get market weakness. The group was weak all day following a Moody's downgrade of several banks, and the selling intensified obviously when the market sold off. This is why we work diligently to highlight and monitor relative strength, rather than trying to simply play the mean reversion game.
Overall, we remain in the bear flag pattern we highlighted last week, and we are once again seeing a powerful snap back from one of the extreme ends of the current range. The M.O. of trading this market has been to be a contrarian when things seems to be overly optimistic or pessimistic. We could see more downside overnight as Europe digests the news and the action in US markets, but it will take time for another low-risk, high-reward trade to really set-up.
*DISCLOSURE: Scott Redler has no positions
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