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Random Thoughts: The No-Taper Rally Is Gone -- Now What?

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Looking to the banks -- and gold -- for clues.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Well I'm learning to fly, but I ain't got wings; coming down is the hardest thing...
-- Tom Petty

It's been a bipolar stroller on Wall Street; following last week's "Oh No You Didt!" decision not to taper by the Federal Reserve, the knee-jerk rally to all-time highs quickly gave back all the gains and then some. The question is begged: Was it a healthy "back and fill" or one of the more vicious head-fakes in recent memory?

In the A.D.D. immediate-gratification stock market, the next catalyst is always right around the corner and the next bogie is the specter of bipartisan bickering and a potential government shutdown. The last time the president and Congress crossed swords over the debt ceiling in 2011, the S&P (INDEXSP:.INX) fell 17% between July 22 (when talks fell apart) and August 8 (after the US credit rating was downgraded).

Will history repeat or perhaps rhyme? Time will tell, but it's worth noting that much of the buying the last few weeks was short covering, which removes a forward layer of demand. Indeed, this market is setting up for a pretty significant showdown into year-end, with performance anxiety-ridden fund managers on one side (ready to chase the tape higher) and late-to-the-party bulls (and their attendant pain tolerance) on the other.

Some Random Thoughts as we together find our way:
  • The financials led the tape lower yesterday and remain on our radar today; BKX (INDEXDJX:BKX) 62 is the August low for that complex, so keep that in mind (the 200-day is down at BKX 58.60). Goldman (NYSE:GS), Deutsche Bank (NYSE:DB), Barclays (NYSE:BCS) and JPMorgan (NYSE:JPM) - which "breaks" under $50 - are the individual stock tells.
  • Through a broader lens, S&P 1709 (the pre-FOMC no-taper rally level) is the initial resistance above, S&P 1700 is a nice round psychological level of note, and S&P 1665 (the uptrend from November) is support below, if and when.
  • Lest you were confused by the latest mixed signals from the Federal Reserve, yesterday's banter by Fed heads cleared up any confusion (or not). Richard Fisher opined that the decision (not to taper) undermined the Fed's credibility (agree) and the "To Big To Fail" banks are a "dagger pointed" at the economy's heart (also agree), while Dennis Lockhart and William Dudley took the other side of that trade.
  • We always ask the "why" surrounding the "what" around here; while Big Ben specifically mentioned the potential for a government shutdown when he communicated his/their decision not to taper (asset purchases), I'm curious how effective that $40 billion/month will be if in fact the government takes its ball and goes home.
  • I, for one, miss free market meritocracy but I'm seemingly screaming into the Grand Canyon; we have to trade the market we have, not the one we want.
  • Tough loss for the Raider Nation last night but boy do the Donkeys look good this year; the better team won.
  • I've updated the gold vs. S&P chart below so it's front and center; things that make you go hmm...

R.P.

Twitter: @todd_harrison

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Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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