Steer Clear of Today’s Unusually High-Risk Market

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The Dow jumped over 400 points Thursday, its largest single-day gain since December 2011. And with the 288-point move higher on Wednesday, its back-to-back advance was the biggest in three years.

The rally was triggered by more assurances from the Federal Reserve that there was no rush to raise interest rates. Encouraging buyers even more, in the afternoon, the Fed said that it would delay implementation of the “Volcker Rule,” which limits banks from using their own funds for risky trades to a maximum of 3%. This is considered a victory for large banks.

Block-buying from hedge funds and large asset managers dominated trading. Volume also grew from portfolio managers’ swaps meant to post gains before year-end while reinvesting in the blue chips of the Dow, which until now have lagged the market.

A new low in crude oil failed to deter buyers, who appear determined to take new positions before year-end. The Dow is now only 1.2% from a record high reached on Dec. 5.

Bond yields rose as demand for safer investments declined. Money was clearly being allocated to the more aggressive parts of the market as illustrated by the 3.5% gain in the iShares NASDAQ Biotechnology Index ETF (IBB).

Initial jobless claims fell to 289,000. The consensus was for a decline to 292,000. The Philly Fed’s Business Outlook fell to 24.5 in Decembers versus expectations for a drop to 26. The Conference Board’s Leading Economic Index increased 0.6% in November.

With no economic reports of note set to be released today, the focus will be on the quadruple witching, when four key options and futures contracts expire.

At Thursday’s close, the Dow Jones Industrial Average rose 421 points to 17,778, the S&P 500 gained 48 points at 2,061, the Nasdaq jumped 104 points to 4,748, and the Russell 2000 gained 17 points at 1,192.

The NYSE’s primary market traded 975 million shares with total volume of 4.5 billion. The Nasdaq crossed 2.1 billion shares. On the Big Board, advancers outpaced decliners by over 4-to-1, and on the Nasdaq, advancers were ahead by 3-to-1.

Russell 2000 Chart
Click to Enlarge

Chart Key

Some traders were no doubt shocked by the Russell 2000’s big gap up on the opening and follow-through. The head-and-shoulders pattern I highlighted in the previous Daily Market Outlook was negated on the opening, so no one should have been fooled by it. As I noted yesterday: “If I am wrong, and I readily admit to the unusually bullish look of Wednesday’s tape action, we will probably know today.”

Russell 2000 Chart
Click to Enlarge

On the minute chart of the Russell 2000, note the big gap opening. The index jumped from 1,174 to 1,187, retrenched and then traded in a flat channel for the remainder of the afternoon. It did, however, close on its high of the day, which is usually, but not always, an indication of a higher opening the next day.

Conclusion

As we approach the end of the year, institutions that have underperformed the market are madly trying to book profits before the final bell of 2014. This creates unusual volatility. In addition, today’s quadruple witching will significantly add to that volatility.

The message is this: If you trade, you will be attempting to execute orders in a highly charged market. In such situations, most public traders stand aside and let the institutions go at it. When the dust settles, there will be lots of pieces to retrieve. But until then, you will be trading in an unusually high-risk marketplace.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/daily-market-outlook-steer-clear-unusually-high-risk-market/.

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