The reason I spend time on stocks is that stock price movements are currently in control of the bond market. Bond prices fell sharply early Wednesday as stocks climbed, and bond prices rose as stock prices fell. But while the Dow is net down 230 points the past two days, bond yields are unchanged. It appears bond traders would prefer to do nothing until the Federal Open Market Committee meeting next week unless the stock market forces them with a major move.
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Traders said oil moving higher triggered the early rally in stocks on Wednesday, and the reversal of that move in oil triggered the decline. Perhaps those two moves triggered the initial directions of stocks, perhaps sending the cue to the algorithm programs to buy then sell, but the sell-off was too broad and volume too high to attribute the move to oil alone. The NASDAQ, with a small weighting of oil stocks, dropped 2% and did not recover much by the close.
Some traders/investors simply used the early rally to dump positions before the end of the year. Many speculative types of accounts have given up on 2015. Plus, we have the usual tax loss sellers.
Big picture, the stock and bond markets have expended a lot of effort this year to go nowhere. Traders are no longer looking for December to make or break the year. But the tone for 2016 could be set this month after the FOMC meeting next week.
Although the Fed’s action next week is all but a given, what the FOMC statement and chair Janet Yellen say could spark some big moves that will carry into 2016. Yellen must be having sleepless nights trying to figure out how to discuss future deliberations by the FOMC without causing tense markets to come unglued.
Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.