“Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year, said an improving job market has increased the chances of a reduction in the Fed’s bond purchases, and any cut should be modest because of too-low inflation.
“A small taper might recognize labor-market improvement while still
providing the committee the opportunity to carefully monitor inflation during
the first half of 2014,” Bullard, a supporter of record stimulus, said yesterday
in St. Louis.” Story at…
http://www.bloomberg.com/news/2013-12-09/bullard-sees-odds-of-taper-rising-along-with-labor-market-gains.html
FISHER WANTS DECEMBER TAPER (Reuters)
(Reuters) - The Federal Reserve
should start to trim its massive bond-buying program next week, and spell out a
clear path for phasing it out altogether, a top Fed official said on Monday.
"It is time to taper," Dallas Federal Reserve Bank President Richard
Fisher said in remarks prepared for delivery to the DTN/The Progressive Farmer
Ag Summit in Chicago.” Story at…http://www.reuters.com/article/2013/12/10/us-usa-fed-fisher-idUSBRE9B810020131210
Taken together, these statements look like a promise of QE tapering in
December, or at least a QE announcement of tapering. Bullard has been a supporter of the QE program
so this is a reversal for him and a firm signal from a voting member.
WILL TAPER CAUSE A CRASH? – NOT YET
There has been a lot of research on the subject of FED action versus the
reaction of the Stock markets. Norman
Fosback in his book, “Stock Market Logic” (originally published in 1976), notes
that it takes three tightenings by the Federal reserve to bring about a
negative reaction by the stock market.
He said the so called, “Three-steps signals constitute a warning that
the market is basically over-priced, but the serious investor must look
elsewhere for more precise timing indicators of a market top”.
There are others who also subscribe to this belief. Bob Brinker’s market timing strategy includes
a Federal Reserve component and he successfully called the valuation top in
mid-January 2000, within weeks of the final top. Prior to the final top of 1527
in late-March of 2000, the Fed had tightened the Federal Funds Rate four times,
in June, August, November of 1999 and in February of 2000. The Federal Funds intended rate went from
4.75% in November of 1998 to 5.75% in February of 2000. (Fed data from…
http://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm Bob Brinker’s Marketimer is a subscription-for-fee newsletter available at..
http://www.bobbrinker.com/ )
So there is recent precedence for Fosback’s analysis – three or four
tightenings spell trouble, but this indicator assumes that the Fed is
tightening to slow the economy. Now the
Fed may reduce QE due to
improving conditions. Even so, I
suspect the markets are now overpriced due to the Fed's QE and will need to correct
after QE.
Another catch here is that none of this history/analysis necessarily
applies to tapering the Federal Reserve’s Quantitative Easing (QE), since that
program of buying bonds to force down long-term interest rates has never been
tried before. We can guess though. Since the tapering will be slow and measured,
the “rule-of-three” is probably a reasonable guess of when the markets may be
under serious stress from less QE. The
real issue is: What will be the bond market’s reaction? One tightening could easily cause a
correction. Art Cashin (UBS) said earlier this week that a 10-year rate above
3% could spell serious trouble for the stock market. The current rate is 2.81%, but it dropped from
2.86% yesterday.
Art Cashin isn’t the only one worried about rising rates. Here’s a comment by Ted Kavadas: “…my
analyses continue to indicate that another financial-system
"crash" of tremendous magnitude will occur. In this
"crash" I expect that 10-Year Treasuries will not be the "safe
haven" many believe them to be.”
See his full analysis at Doug Short’s website at… http://advisorperspectives.com/dshort/guest/Ted-Kavadas-131210-Interest-Rates.php
Bottom line: A December Taper could bring the long awaited correction,
perhaps in December or January. A crash
probably remains further off. In 2000,
the S&P 500 didn’t fall below 1470 (about 4% lower than the top) and remain
lower than 1470 from January until September so it is quite possible that a top
now (if it were to ocurr) will be prolonged even if the Fed does continue tapering. Further, there is nothing that says Fed
action alone will cause a crash; it will, however, stress markets and make them
less able to withstand other shocks.
Speaking of stress and shock, see below…
TRIPLE TOP (MarketWatch) —
“…The stock market may be forming a dangerous triple top of major
long-term significance. That’s because
the Dow, in inflation-adjusted terms, is no higher today than it was at the
2000 and 2007 tops…That puts the market in a “make or break” position. On the
one hand, it would be a sign of significant strength if the market were able to
break through the “resistance” created by the 2000 and 2007 tops On the other hand, if the market were to turn
down from close-to-current levels — and thereby form a triple top — then it
would mean that the market on three occasions had tried, and failed, to break
through to higher levels…if you believe in technical analysis, the market is at
a very critical juncture.” - Mark
Hulbert, Hulbert Stock Newsletter Sentiment Index. Full story at…http://www.marketwatch.com/story/market-could-be-hitting-a-dangerous-triple-top-2013-12-10
MARKET REPORT
Tuesday, the S&P was down 0.3% to 1803 (rounded).
VIX rose 3% to
13.91. Tuesday, the S&P was down 0.3% to 1803 (rounded).
A statistical warning bell went off yesterday due to lack
of volatility (price swings – not VIX).
The last time this particular indicator flashed caution was 3-days
before the mini-top on 18 September (and for several days after) that was
followed by a small 4% downturn. This is
just another indicator of possible trouble in the market now.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing fell to 47%
at the close Tuesday. (A number below 50%
for the 10-day average is generally bad news for the market.)
New-highs outpaced new-lows Tuesday, leaving the spread
(new-hi minus new-low) at plus 26 (it was plus 97 Monday). The 10-day moving average of change in the
spread fell to minus 7. In other words,
over the last 10-days, on average, the spread has decreased by 7 each day.
Market internals are now negative on the market.
Market Internals are a decent trend-following analysis of
current market action, but in 2013 (so far), if I had been buying the positive
ratings and selling negative ratings I would have under-performed a
buy-and-hold strategy.
I need a pullback to get back in. Otherwise I will continue to sit out the
party. Internals look iffy. Sentiment is terrible. The S&P 500 was 9%-above the 200-day MA
yesterday. The odds of a pullback look
better than even, but the markets will probably remain flat to slightly up over
the Holidays depending on the Federal Reserve.
MY INVESTED POSITION (NO CHANGE)
I remain about 20% invested in stocks as of 5 March
(S&P 500 -1540). The NTSM system
sold at 1575 on 16 April. (This is just
another reminder that I should follow the NTSM analysis and not act emotionally
– I am now under-performing my own system by about 6%!) I have no problems leaving 20% or 30%
invested. If the market is cut in half
(worst case) I’d only lose 10%-15% of my investments. It also hedges the bet if I am wrong since I
will have some invested if the market goes up.
No system is perfect.
I still lean toward getting back in, after a pullback, to
speculate on a final ride to the top.
NTSM did give several buy signals over the weeks of 14 and 21 Oct, but
the market just looks too frothy to rush back in…we’ll see if the market will
pullback so I can join the insanity. If
not, cash is (grit my teeth and put on a false smile) fine.
