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What Now, Mr. Bernanke? Traders Position Into the FOMC Rate Decision


Will he hint at tapering or remain vigilant? And will the market balk?

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

The bulls and bears have been engaged in a technical war; after six straight months of higher lows and higher highs, the tide turned last month, producing a series of lower highs and lower lows -- a sign of distribution and the first serious test of 2013.

Yesterday, the dueling channels, as they've been dubbed in Minyanville, seemingly resolved in the direction of the broader trend, in this case to the upside. While the bulls still need to push the tape higher through S&P (INDEXSP:.INX) 1648 -- a level yet to be attained in June, and one that could trigger an inverse Head & Shoulders pattern that "works" to S&P 1688 in a technical vacuum -- they must do so into the biggest event of our young summer.

Big Ben, our Federal Reserve Chairman who, according to President Obama, stayed at his post "longer than he wanted," will release the FOMC "rate decision" tomorrow at 2 p.m. EDT. Given that we now have a clear signal that Mr. Bernanke will step down when his current term expires next year, his actions, or inaction as the case may be, will be highly scrutinized as he has long held the keys to the printing press and license to his helicopter.

These are trying times for the system formerly known as capitalism. Between the heavy hand of the government, the uneven playing field for the small investor (HFT), and the frenetic pace of information, due in large part to the fragmentation of media and the speed at which it's delivered, trading these days is an adventure in and of itself. In the first phase of the financial crisis, we eyed The War on Capitalism, and it appears to have played through, and then some.

So here we are, mid-June 2013, with the S&P, the Dow Jones Industrial Average (INDEXDJX:.DJI) and the NASDAQ (INDEXNASDAQ:IXIC) all up +/-15% YTD. We're halfway home, as least in terms of annualized returns, but few I know are enjoying the ride. Perhaps this is the wall of worry we hear about so often, the one that bull markets like to scale. Or, it could be a telling sign -- a frightening disconnect between perception and reality, with social mood moving in one direction and performance in the other.

Yesterday, after entering the week with some short exposure in the S&P (40% of a full position), I flipped my book midday and took down some upside exposure. The catalyst was the pattern discussed earlier, but it's not as sexy as it sounds; if you're a half-step slow, as I seemed to be, it was a pretty frustrating session. Thankfully, I didn't blow out of my exposure into session lows, opting instead to wait for the end-of-day Snapper that once again arrived on cue.

While I carried that risk -- 45% of a full position -- into today's trade, I'm well aware all that matters for our forward path will be what Bernanke has to say tomorrow. Will he hint at tapering the synthetic stimuli that has fueled the stock market rally, or will he walk the party line and remain vigilant as they monitor future data? Given this is Mr. Bernanke's swan song, I would imagine he tries to navigate a soft landing, so to speak. Thus, the 15-trillion-dollar question becomes: Will the market let him?

I've been trading 23 long years and writing about it in real time for more than half that, and I'll tell you, this is the most F.U.B.A.R. environment I've ever seen -- and I've seen plenty of F.U.B.A.R. markets. When the tape moves on what a journalist writes about what may or may not happen in the coming days, as we saw yesterday after the Financial Times article posted, you have to ask yourself what it's all about, and if you have a competitive edge. This is not our father's stock market; not even close.

Speaking of which, each of us will have the edge of a marble at 2 p.m. EDT tomorrow; while we might get the "statement" right (my read: status quo and watching closely), the reaction to news will be more important than the news itself. For my part, I expect to flatten my S&P exposure before the announcement as I work too hard to make money and it's too easy to lose it. I still have some single stock exposure on my sheets; that's a different conversation.

I will say this: I don't believe "close your eyes and ride the tide" will carry the market through year-end. I believe there will be a serious gut-check at a point and the recent 5% pullback doesn't qualify. As such, my game plan is to continue to identify advantageous risk-reward, define my risk, and practice discipline over conviction as we together find our way. It's not sexy, mind you, but it's a process that shakes shekels from the tree while allowing me to sleep at night, and that's a good thing in this day and age.

Random Thoughts:
  • A picture speaks 1,000 words; here are the aforementioned "dueling channels"
  • And here is the inverse Head & Shoulders pattern that could trigger should the S&P push through 1650. Just remember, technicals are just one of our four primary metrics, along with fundamentals, structural, and psychology.

  • I nibbled on some Facebook Inc (NASDAQ:FB) yesterday, via August call options, with defined risk, per the trend line below.
  • Good traders know how to make money; great traders know how to take a loss.
  • My computer keeps telling me my physical memory is low. How the heck does my computer know how A.D.D I am?
  • Our overseas banking proxies -- Deutsche Bank AG (USA) (NYSE:DB) and Barclays PLC (ADR) (NYSE:BCS) -- gave the bears an early downside wink yesterday. The financials remain a primary tell as they encapsulate so many dynamics of our rate-sensitive, highly-leveraged finance-based economy.
  • The S&P hasn't traded above 1648 thus far in June; that's likely why the bears are making such a stink at that level.
  • Anyone else remember when the Federal Reserve didn't target asset prices?
  • I'm still looking for a "pure" cannabis play (I think this is biotech circa 1990) but to my knowledge, there aren't many options. Between 1) increased tax revenue, 2) lower crime rate, 3) impact on prison overpopulation, and 4) the fact that the industry isn't covered by Wall Street, there are a lot of reasons for the legalization of marijuana to mirror the repeal of prohibition in 1933, in my view.
And Finally, a Minyanville Mailbag...

Minyanville reader Dan writes:


I am an original Minyanville member who started reading you when you were with Cramer. I know you have at times been short the S&P 500 (NYSEARCA:SPY) but I wondered your degree of conviction. Do you think it is just a matter of time before the wheels come off -- again? Inquiring minds want to know.

Your thoughts in the past have saved me. Thanks for that.
Hey Dan,

I'm just trying to trade around the market and make hay while the sun shines. To your point, I do not think this ends well, BUT I respect the motivated agendas of global central banks, so it becomes a question of timing and degree.

The bull case is that the government swallows hard and writes off the toxic debt they've consumed; the bear case is that IF markets are to be free again, they must clear at levels unencumbered by synthetic demand -- and that's likely much lower than here, all else being equal.

The trick to that trade is that all else is not equal right now -- policymakers, HFT front-running, etc. -- so we must continually peer around the corner at what might be and assign probability to that, which is much easier said than done. Not sure if this helps, but it is what it is, as they say. Hope this finds you well



Twitter: @todd_harrison

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