Traders chase both sides of Fed debate.
Is this a signature day for the markets? Not clear yet, but a couple data points: 1) heavy volume, 2) spike in volatility, and 3) a key paragraph from the FOMC Minutes:
"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."
Uh-oh...they mentioned a June meeting! It's over! Aargh!
Hold on: "views differed about what evidence would be necessary and the likelihood of that outcome."
They can't even agree on what evidence would be sufficient for them to begin tapering! With the voting members heavily weighted toward doves, does anyone think the Fed is going to taper in June? Anyone? I didn't think so.
In my informal, unscientific surveys of traders, only about 25 percent of the traders I talk to believe the Fed might begin tapering by September; the majority believe they will not do so until 2014.
They could be wrong, but unless we see Nonfarm Payrolls over, say, 250,000 for the next three months, I too think it is unlikely the Fed starts tapering in the next few months.
Instead of asking, "Why did we drop midday?," let me turn this around and ask, "Why did the Dow move up 150 points right after the Bernanke testimony--why were we up in the first place, given that Bernanke was very balanced?"
The answer is, traders are chasing both sides of the story.
The guys who believe the economy is weak--and that the Fed will not move before 2014--point to comments from the Fed minutes like, "Many on FOMC Wanted to Wait for Stronger Data Before Tapering," or "Many on FOMC Said More Progress Needed Before Slowing QE Pace."
Note the phrase, "many."
But many are now trying to position themselves hawkishly and are trying to drag the market in their direction.
Finally, several have asked why the market sold off at 1:00 p.m. ET--an hour before the Fed minutes. Silly theories that "someone knew something" aside (please), news of a police officer being killed--and hacked to death--in London--along with disturbing video of one of the apparent killers with blood-soaked hands--may have been a factor in the markets drop.