Behind the Scenes

FOMC minutes will be released at 2PM ET today.  Some see the minutes as an opportunity to get a behind-the-scenes look at the real Fed agenda.  I see them more as a tool the Fed uses to communicate what it wants the market to hear.

Bernanke has already stated, and reiterated, that some tapering will likely begin “later this year.”  From June 20:

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year…

…we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

SPX traded at 1654.19 on the 18th, and subsequently fell more than 100 points on fears of tapering.  Yesterday, it traded as high as 1654.18.

It is possible that the “random walk” of 500 stocks — reflecting the collective wisdom of both bullish and bearish investors, discounting the present value of future cash flows, etc. — just happened to come up one penny short of the previous high.

But, I think it’s more likely that TPTB have a very specific game plan in mind.  The trick, as always, is to figure out what it is and trade accordingly.  I’ve tried decrying the lack of orderly trading and transparency — it doesn’t help at all and is not very profitable.

Some of you might have noticed the following chart in our May results post.  It shows the effects of the gaps up and first hour of trading following ramp jobs in the overnight markets.

In May, for instance, the S&P 500’s net gain of 35 points (+2.2%) was dwarfed by the 100 points gained via ramp jobs.  Without them, the month would have shown a 65-pt, 4% loss.

Between Apr 18 and May 22, SPX traded in a very steep, very narrow channel (below, in red) that carried it from 1536 to 1687 in one month.

Looking at it closely, we can see that 120 of the 151 points came in the first hour of trading following ramp jobs.  The total rises to 164 points if we include the first two hours of trading.

Aside from punishing those who don’t trade the futures markets, this obvious bull market engineering should be a reminder to all that there is always an agenda.

*  *  *  *  *

Since SPX closed within the purple channel dating back to November 2012, we should expect some positive follow through.  But, the momentum was turning negative in yesterday’s closing minutes — and SPX likely would have closed back below the channel if someone hadn’t pumped it at the close.  Things aren’t always what they seem.

We laid out the different scenarios and targets in yesterday’s post.  Today will be about reading the tea leaves and following along — whatever the market has up its sleeves.

Since the market is all about fake-outs lately, I assume that the manner of yesterday’s close indicates declines ahead that the MM’s didn’t want the average Joe to see coming.

I’ll short any breakdown of the rising wedge and go long on any breakout — trying to stay nimble enough to change positions when the market changes its mind — especially around 2PM.

UPDATE:  10:18 AM

Getting a little breach here…  I’m tempted to take a short position at 1651, but this is probably the first of many fake out attempts.  We’ll know it’s something more if it back-tests the wedge and breaks through the purple channel bottom — currently at 1647.50.

Note that the bottom of the purple channel intersects with the .75 line of the rising red channel and the .75 of the falling white channel at around 1647.75 in about an hour.  This could be a significant time & price — just as the previous intersections were.

UPDATE:  10:46 AM

I’ve fine tuned the purple channel and like the possibility that this is a back test of the bottom.  I’ll try a long position here at 1649, with stops just below at 1647.50.

The red channel top is up at 1657 and the .786 is at 1660.03 — so decent decent risk:reward.

A break below would likely target 1638.72 — the .618 Fib retracement of the 1687 – 1560 drop.

From the You-Can’t-Make-This-Stuff-Up Department, Jack Lew is lecturing the Chinese on cyber-espionage:

Lew said that for economic relations between the two countries to succeed, U.S. firms had to be “preserved and protected from government-sponsored cyber intrusion.”

In a completely unrelated story, the manhunt continues for Edward Snowden — the former NSA contractor who alerted the world to the enormity of America’s cyber espionage program.

Also this morning, Zerohedge reports that the NSA has embedded its own code — known as Security Enhancements for Android — in the Google Android operating system.  Android shipments totaled 162.1 million units in Q1 2013 — 75% of all smartphones shipped.

Eventually all new phones, tablets, televisions, cars, and other devices that rely on Android will include NSA code, agency spokeswoman Vanee’ Vines said in an e-mailed statement.

Thank God for the NSA.  At least we won’t have to worry about those sneaky Chinese!

UPDATE:  1:55 PM

The market has essentially gone nowhere since this morning’s first posts.  SPX is sitting just below 1651.

My expectations: if 1655 is broken, look for 1660 or 1672.  Downside, a break of 1650 leads to 1638 or 1623.  FOMC minutes should be released in a few minutes.

UPDATE:  2:08 PM

The minutes are available HERE.

UPDATE:  2:15 PM

My initial take is that this represents no dramatic change from the latest statements by various Fed governors or the Bearded One himself. The biggest news is explicit discussion of support for an end to QE by the end of the year.

Half the voting members would support ending QE late this year, while “many” others said it would need to continue into 2014. Participants also described their views regarding the appropriate path of the Federal Reserve’s balance sheet.  Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.

Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, or that continuing purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. A few participants, however, indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by slowing, or stopping, its purchases at the June meeting.

I suspect that using the word “end” rather than “taper” will attract some attention.

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