Wall Street rebounds after Wednesday’s Fed-inspired reversal

Sideways correction in stocks continues. Also, BREAKING NEWS: The U.S. Senate has invoked the “nuclear option,” breaking the Democrats’ Gorsuch filibuster.

Wile E. Coyote swinging on a bungee cord, just like the stock market. (Screen grab of Warner Bros. cartoon, via YouTube)

WASHINGTON, April 6, 2017 – Our two columns have been playing hooky this week, largely because we didn’t have a lot to say, at least on Monday and Tuesday. Wednesday looked pretty benign, too, and even tried to reignite the Trump Rally. The Dow Jones Industrial average was up well over 100 points for roughly the first half of the trading day.

Read also: Trading Diary: Dull stock market action, heady IPO games

But then, the Fed, as it often does, chose that moment to release its March minutes, and bang—it was crash city, as all markets violently reversed themselves. The turd the Fed dumped into the punch bowl was a suggestion that the central bank might start trimming its bloated balance sheet later this year, aiming to whittle a trillion or or more dollars off the groaning Federal debt load.

Fiscally, that’s probably a good thing. But what it also might mean is that money might get tighter which, in a way, is worse than a rising interest rate environment because, effectively, pulling away the stimulus such as it was (the little guy rarely benefited from the Fed’s largess) would likely cause interest rates to jump anyway. It’s sort of like that old 1980s commercial (or was it the 1970s) refrain: “You can pay me now or you can pay me later.”

Thursday morning action is positive again, and it looks as if the market is making a half-hearted attempt to resume that Wednesday morning rally. Oil continues to firm (at least at the moment), gold is getting a bid again after getting hit earlier in the week, so market action looks good at the moment.

But on the whole, we’ve continued to see fairly steady selling in stocks—which financial analysts call “distribution”—over the past 2 weeks or thereabouts, which is not a good sign. Even the often-bullish Investors Business Daily’s market tracker has gone “neutral” on the market, indicating that the market’s lengthy uptrend is now under pressure. Which means it might not be a great time to buy, as stocks could be lower soon.

“Neutral” seems to be a good word here when it refers to the proper market posture for investors, namely, skepticism. On one hand, we had excellent March employment numbers coming from ADP Wednesday, which seemed to be the major reason behind that initial rally.

But then the Fed fouled the punchbowl on a second front in addition to the balance sheet brouhaha. The Atlanta Fed’s CDPNow survey weakened, putting up a yellow light for the bulls. If this continues, the selloff might continue, too. We still think that this is a sideways market that would like to work off excess market enthusiasm by going absolutely nowhere for a time, until actual earnings catch up with reality.

Finally, whatever the pundits say, in terms of direction, stocks worked off their oversold condition as illustrated by a recent reading of the McClellan Oscillator, which showed that stocks again became “overbought” in just one trading day, something that usually means another correction. Which is precisely what we got on Wednesday as the bears raided the party and threw out all the bulls.

What a week. And we still have today and Friday to get through, something that will become more fun if and when the Republican controlled Senate finishes Harry Reid’s dirty work and executes the so-called “nuclear option” by killing the filibuster for Supreme Court nominees and endorses Neil Gorsuch to replace the late, great Antonin Scalia on the nation’s highest court.

If the Republicans really do show some spine on this one, that could give lovers of capitalism a boost.

UPDATE: The Senate has just “gone nuclear,” clearing the way for a Friday vote on the Gorsuch nomination, according to a report just in via CNBC:

“The chamber voted 52-48, along party lines, to take the “nuclear option,” removing the 60-vote threshold to advance Supreme Court nominations in favor of a simple majority. Earlier Thursday, Democrats blocked the cloture vote on Gorsuch, President Donald Trump’s pick for the court.

“The Senate then voted 55-45 to advance Gorsuch’s nomination for an expected Friday confirmation vote. Three Democrats up for re-election in red states — Heidi Heitkamp of North Dakota, Joe Manchin of West Virginia and Joe Donnelly of Indiana — voted to end debate.”

As to whether this latest “controversial” Supreme Court will influence Wall Street in any way going forward, we’ll just have to wait and see.

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