Tuesday’s market faded in the late session somewhat unexpectedly on no news. While that isn’t particularly rare, it did make us wonder if something was going on behind the scenes. There wasn’t a lot of new fundamental data due to be released this week and earnings season is still a week away from really ramping up.
A Near Miss or a Calculated “Mistake”?
As it turns out, there really was some news being passed around behind the scenes. The Fed released the minutes from the last FOMC meeting at the right time (2:00pm Eastern)… but a day early. This early broadcast went to a supposedly small group of trade organizations and Congress members on Tuesday. However, rather than tell the public what happened, they waited to disclose that information and the minutes themselves to the rest of us this morning.
The minutes reaffirmed that the Fed sees the benefits of QE outweighing the risks. It included the obligatory “hawkish” (leaning towards higher interest rates) concerns from a few Fed members so traders don’t get the wrong idea that the Fed isn’t considering the risks of inflation, but there wasn’t any alarming information.
So was the selling on Tuesday due to the fact that many investors stopped buying because they knew there would be investigations of insider trading?
It Wouldn’t Be the First Time
It seems quite probable to us. Investors who wound up with the inappropriate information would want to put some space between the information itself and taking action (even if only a few hours) and they were finally comfortable doing so during the overnight market. Normally, we would expect an early leak like this to potentially drive a selling frenzy. This makes us lean even further towards the opinion that this is not a case of a near-miss but was instead a calculated “mistake” intended to reassure investors that the Fed still intends to keep the pedal-to-the-metal in the short term.
Can we prove it? We probably never will, but the “leak” should ensure that the report will be the dominant headline before the big bank earnings (due this Friday and early next week) are released.
Click to Enlarge Once the news was “officially public” traders were even more anxious to buy than they were last night. This has analysts scratching their heads about whether it’s possible for a rally to continue when the leading sectors are defensive… has that ever happened before? Yes, but it is extremely rare and tends to be short-lived.
In fact, a very similar chain of events happened last year towards the end of the first quarter. In the chart at right you can see how that episode played out.
- Small cap stocks in the Russell 2000 Index (NYSE:IWM) begin to underperform the Consumer Staples Select ETF (NYSE:XLP) from February-March 2012.
- However, despite the “divergence” of defensive stocks outperforming small-caps, the market was able to reach higher-highs in March.
- Traders started to finally take profits only after a completed head and shoulders pattern in early May.
This kind of thing is very interesting to market technicians but it tends to put traders a little on edge as they deal with the reality of having to make bearish vs. bullish decisions in the live market. There are some important lessons to learn from the episode last year. First, the trend should be considered intact until strong evidence exists to the contrary. And second, while a certain mix of bullish and bearish positions makes sense, the holding period should be short to accommodate the likelihood of a channel.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.