Market Analysis for May 4th, 2004

Today was a fascinating day for one very obvious reason -- that no one really knew how the market and indices would react to the Fed interest rate statement. Virtually no one expected the Fed to change rates today, but everyone expected the Fed to change the wording of the statement. The Fed did change the wording, and what the media and Wall Street seem to have focused on after the statement came out is that the Fed is more concerned now with the growth of the economy and inflation and has told us in very opaque language that the risks have changed and the policy accommodations can be eliminated.

With the Fed telling us that, the pundits and gurus seem to think that sooner than later the Fed is going to raise rates. The question is, If it's sooner, what does that mean? Sooner could be as soon as early next week, in fact, if they have a reason to do it between meetings. If the employment numbers this coming Friday show a big addition to company and government payrolls, then the bond market is going to get all upset and probably so will the stock market because the Fed will have missed an opportunity to do today what the markets probably would think they ought to have done today, which is raise 50 basis points. So a rate hike could be as early as next week. If there are 300,000 additions to payroll, it could mean that the Fed hikes much sooner and even between meetings.

The longer the Fed waits to pull the trigger and the longer perceptions fester about inflationary concerns and continued strong economic growth, the less confidence the markets will have in the Fed, and there is where the problems could arise. That's where the indices and the Qs and bond market could all head south together.

The E-minis
With that as a backdrop we had a wild day today. Just taking the E-mini June S&P, we had a range where we were hovering around 1117 for most of the morning. We failed three times to get through 1119, and then we pulled back to 1110 ,. From there we rocketed after the Fed announcement. The upmove was delayed a little bit, but nonetheless the S&P went from 1110.50 at its pullback low this morning to 1127.50 at its spike highs after the Fed announced.

But a funny thing happened after the spike high. The E-mini S&P came careening down to 1114.50 and closed at 1116. So just from the low and the high of the day, which was 17 points, the E-mini June S&P closed 5 points off the low and 12 points off the high.

So after a Fed meeting where the Fed was given high marks for saying what it really meant as opposed to putting out a lot of obscure language, the market still was not able to tack on and sustain its rally.

What we have now from a purely technical sense is that we had a move from Friday's low at 1103.75 to today's move at 1127.50. That move to me looked countertrend in form, and the fact that the close, although unchanged, was near the much lower side of the days' range suggests to me that we're going lower perhaps into Friday because people will be afraid of the reaction to the employment numbers.

So the key levels as we go forward for the next several hours are 1110.50. If that breaks, I think the E-mini S&P continues to accelerate to the downside through last Friday's lows to beneath 1100.

On the other hand, if for any reason at all the E-mini S&P takes out today's high at 1127.50, then all bets are off on our analysis that we have completed a countertrend rally and have resumed the dominant downtrend again.

QQQs
With regard to the QQQs, the Qs had a wild day also, and that too was influenced heavily by the Fed's statement. However, an interesting thing about the Qs: They had a low Friday of 34.71, and the first rally in the Qs into yesterday's high got to 35.52. That's about 80 cents. Then the Qs pulled back yesterday afternoon and nearly retested Friday's low but not quite, getting down to 34.89. Today's rally based on the Fed took the Qs to a high for the recovery at 35.74 and that too was about 80-85 cents from yesterday's pullback low.

So what I'm driving is that that the two major corrective uplegs in the Qs both approximated about 80-85 cents between Friday and today. From the peak of the second equidistant leg at 35.75, the Qs gave up and tanked into the 35.25 area, and basically closed up 15 cents, 50 cents off the high and 22 points of the low for the day.

So here again, similar to the S&P, the Qs left most of the action above its close today, which is a distribution type of day and is not bullish.

Our work also suggests that the form of the rally from 34.71 to 35.75 is countertrend and that the Qs already have started on the way down in a new leg that should break Friday's low and continue lower into the 34 even next target zone.

Only a move above 35.75, today's high, would seriously make us question this analysis.

For now we think the bears have control of the Qs and for that matter control of the E-minis as well.

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