Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s market

 

Wall Street traders often front-run major events that are likely to move the markets.

It’s the old adage of “buy the rumor, sell the news” (though in reverse).

Is that what’s been happening with the market weakness over the last few weeks? Have traders been bailing on stocks based on the rumor of what the Fed will do, preparing to buy back stocks after the fact?

Our technical experts, John Jagerson and Wade Hansen of Strategic Trader believe that’s what’s been happening.

From their Wednesday update:

Traders like to be ahead of the curve by both buying before the news is confirmed and then taking their profits off the table once the news is official.

The opposite phenomenon frequently occurs as well; traders sell their stocks before the news is confirmed and then buy back into their previous positions once the news is official.

While there isn’t an old saying that goes, “Sell the rumor; buy the news,” we think that is what has been happening in the stock market.

Traders have been worried for the past two weeks that the Federal Open Market Committee (FOMC) might signal the following things in today’s Monetary Policy statement:

• More than four rate hikes this year…
• An individual rate hike larger than a 0.25%…
• An accelerated tapering of its bond-purchase program…
• And a dramatic reduction of its $9-trillion balance sheet this year.

This worry has caused traders to sell into the rumor… or the worry, in this case.

As you know, the Federal Reserve released its policy statement on Wednesday.

How did it impact these fears? And what does that mean for a market rebound?

Let’s find out.

***Is Wall Street “buying” the news now?

For newer readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

In their Wednesday update, they dove into the details of the Fed’s policy statement. They identified language that speaks directly to the fears that have been weighing on Wall Street traders.

From the update:

The FOMC just released its statement, and here’s what it said:

• It will likely start raising rates in March.
• “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
• It is not planning on more than four rate hikes in 2022, but it’s not taking the option off the table.
• “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
• It will be accelerating its tapering… slightly.
• “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.”
• It has no plans to start dramatically reducing its balance sheet.
• “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”

John and Wade sum up by saying they believe that this statement should ease Wall Street’s worries.

Now, that doesn’t automatically mean these traders will push stocks higher. Rather, it just removes this overhang from the market. But traders are still highly sensitive to economic data and earnings.

***On that note, we’re beginning to see a pattern of Wall Street shrugging off strong earnings, focusing on weaker guidance

Take Tesla.

On Wednesday, this market darling reported strong fourth-quarter results that included a record number of vehicle deliveries.

Adjusted earnings came in at $2.52 per share versus the forecast of $2.36 per share. Revenue rose 65% year over year in the quarter, while automotive revenue totaled $15.97 billion, up 71%.

Great quarter, right? Deserving of a nice pop in the share price?

Nope. Wall Street decided to focus on the potential for problems in the months ahead.

Tesla sold off 5% after hours on Wednesday. And the pressure continued yesterday, with the stock ending the day down 12%.

Here’s CityIndex explaining why:

Tesla warned its ability to meet its ambitious target to grow deliveries this year will depend on the availability of equipment, maintaining operational efficiency and ‘stability in the supply chain’.

It is that last factor that markets fear the most.

Tesla has so far proved to be far more resilient to the supply constraints hampering the global automotive market compared to its rivals, but the company is not immune and warned supply chain issues are ‘likely to continue through 2022’.

***It was similar with Netflix’s earnings last week

The streaming giant beat on its bottom line and was in-line with revenue expectations. But shares plummeted in after-hours trading based on fears of slowing subscriber growth.

From The New York Times:

Netflix added 8.3 million subscribers in the fourth quarter, raising its worldwide subscriber base to 222 million, but the company said on Thursday that it expected growth to slow in the opening months of 2022.

That news, in the company’s earnings release, prompted the stock to drop nearly 20 percent in after-hours trading.

Netflix ended up falling more than 30% over ensuing trading sessions and remains down 26% as I write.

Now, compare Tesla and Netflix to Apple, which released earnings yesterday after the bell.

The world’s most valuable company smashed its revenue record, also topping earnings of $30 billion for the first time.

Most importantly, CEO Tim Cook said that the supply chain challenges are improving. Though Apple hasn’t given formal guidance since the beginning of the pandemic, here were Cook’s comments:

What we expect for the March quarter is solid year-over-year revenue growth.

And we expect supply constraints in the March quarter to be less than they were in the December quarter.

Bottom-line, Apple’s growth story remains intact. So, its share price is benefitting, up 6% as I write.

This all points toward a reality of today’s market…

What matters now is growth.

Can a company continue to grow despite inflation, a rising rate environment, and the threat of a slowing economy?

If so, Wall Street will reward it. If not, watch out.

***Looking at growth on a macro level, we received encouraging GDP news yesterday

Gross Domestic Product grew at a 6.9% annualized pace in the fourth quarter. That’s much higher than the 5.5% estimate.

Plus, consumer spending, which makes up more than two-thirds of GDP, climbed 3.3% for the quarter.

So, there are positives here (despite today’s massive inflation number…but that’s no surprise anymore).

Just make sure any trade you’re considering is similarly rooted in fundamental strength – which means growth.

Returning to John and Wade, they believe some short-term bullish trades are setting up.

They’re not pulling the trigger yet. Instead, they’re giving the market a few more days to digest recent news. But they’re feeling cautiously bullish.

I’ll give them the final word:

What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter – traders are already pricing that in. What is important is whether the underlying fundamentals are still positive…

We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio.

However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits.

So, for now, we don’t recommend making any changes to our trades. Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.

Have a good evening,

Jeff Remsburg