Market Tells Are More Useful Than Predictions or Comments

There was a slew of talk and predictions over the last few days that were to serve warning over equity market players, but what transpired as another up week with another very strong day on a Friday, the second consecutive big gain to end a week.  On Thursday we heard some ‘off the cuff’ comments from Fed Chair Janet Yellen, her thought that equity valuations were ‘quite high’, yet we know that condition is rather arbitrary.  Maybe she commented with a ‘wink’ to the markets.  The valuation question is a valid one but it is quite difficult to time this and predict when money will be fleeing.

Many had thought a very strong jobs number would push the Fed toward raising rates sooner rather than later.  The in line jobs number for April was far better than March yet we saw Fed Funds Futures rise, decreasing the chance of rate hikes coming soon.  In fact, the first fully priced 25bps rate hike is now pushed out to Jan 2016.  Regardless of the jawboning Fed or other economists/forecasters, the MARKET is telling us what we should expect (see below).

Fed Funds Futures

Therein lies the question of whether we should listen to predictions or just the market action.  I have been a student of markets for many years and have come to find the market tells us the truth.  I do not have to listen to the pundits, experts, predictions or forecasts to know where price is headed.  Just yesterday we saw this very appropriate quite from the Investors Business Daily:

Whatever skills Federal Reserve heads have, analyzing the stock market isn’t one of them.  Fortunately, there is a better alternative: the market itself. The market is constantly giving feedback, and those clues are more useful than individual opinions.

On CNBC and other business networks the pundits came out in full force claiming the market was due for a sharp correction and perhaps the six year bull run was over.  Yet at the end of the week we found markets up from the prior Friday, washing out some bull players midweek, catching many off guard Friday after a rather ‘pleasing’ jobs report.

I noticed before the jobs report was released that the market was bid quite strong and after the midweek rout the indicators I follow were stretched too far down.  I talked about this frequently on Thursday, a sharp bounce was due.  This was not a prediction. rather just reading/listening to the message of the market.
As we see on the chart the SPX 500 is chopping around in a range, but is not giving clues of severe distribution (institutional selling).  All we can see here is some consolidation on the right side of the chart after a very sharp rally in February, a collection of higher lows.

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Repeatable patterns of fear and greed show up in the charts over and over again, human behavior never changes.  Did you find yourself listening or trusting others, jumping out of stocks because of something you heard or read from someone?  I saw a quote this weekend on twitter that reminded me of something Jim Cramer says daily:  ‘The key to making money in stocks is not to get scared out of them.’

The McClellan Oscillators reached some very extreme levels on Wednesday that gave us good odds of a market snap back.  We have seen on numerous occasions when the oscillators for the NYSE (shown) and Nasdaq fall to extremely low numbers that sellers exhaust themselves and a violent rally ensues.  That happened on Friday, we were positioned correctly for the strong day – because we listened to the markets and not an opinion.

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