Market Follows Its Course, Not the News

Yes, I know, you've heard from me before how the news doesn't matter. But this time, you figure, it really does matter. Right.

Let's see how much the news mattered yesterday. After the "news" came out at about 2:17 p.m. Eastern time that the Fed wouldn't change rates for the time being but someday might do so (now that's a big story!), what did the market do? At first it firmed up a bit, then it sold off.

Sold off to where? Well, initially, the S&P futures sold off just below the morning lows at the 1048 level. Of course, the gap-up opening in the S&P from 1041.70 had left a vacuum from 1041.70 to the morning lows of 1048.00. No big surprise the futures pulled back into that gap and, after the obligatory stop hunt below the morning lows, firmed up again (with the weak holders already blown out of their positions).

From there, where did it go (supposedly guided by the news from the Fed)? Naturally, up to fractionally higher highs for the day, where there were buy stops waiting to be triggered. From there, after the buyers had gotten on board at new highs for the day, the S&P (and everything else) collapsed to new lows for the day, in the case of the S&P cash and futures, down to fill the opening gaps. Those gaps at 1045.41 and 1041.70 were filled by just pennies at the lows as the cash bottomed at 1045.15 and the futures bottomed at 1041.50 before bouncing into the close.

So what did the news have to do with any of that? Absolutely nothing.

S&P Futures -- The tail is wagging the dog Source: Lind-Waldock

Now this morning, it's back up to higher highs, and here as well, it's no coincidence where it topped out. This morning's high in the S&P Futures has been 1062.00, which filled last Friday's tiny sliver of a gap at 1061.60 in the futures by a fraction of a point. From there, the market has backed off again (to the 1056 level of the futures), as it should after an upside gap is filled. After all, that is the point of this: figuring out what levels will turn the market.

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At the time of publication, Schiller was long Rydex mutual funds up to 30% levels, bullish short puts in Russell 2000 (December) puts, bullish credit spreads in the SPY puts, bullish debit spreads in DIA calls.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.