Ben Bernanke Can't Be Too Happy
Thought for the day: Ben Bernanke probably isn't too happy right about now.
After rescuing the global banking system from the brink of collapse in 2008, after dealing with not one, not two, but three European debt crises over the past four years, and after surviving at least two rounds of political shenanigans in Washington, D.C., the Fed Chairman may have thought that his work was finally done.
Coming into mid-September, things were looking pretty good. There was talk that the Fed might actually be able to start tapering the stimulus it was providing to the economy via QE3. The housing market was clearly on the mend. The U.S. banking system was sound again. Jobs were being created. Corporate earnings were at or near all-time highs. Europe's economy was starting to improve. The stock market was at an all-time high. And the U.S. economy was finally moving forward at a decent clip.
In short, "Gentle Ben" Bernanke was able to breathe a sigh of relief and look forward to his retirement from the U.S. Federal Reserve.
And Then Everything Changed
But then the games in Washington began again. After an eight and one-half month hiatus, political brinkmanship returned in a hurry. Back came the name-calling, the finger-pointing and the never ending claims about which party is #winning. Back came the nonsensical claims by each side that if only their opponents would come to their senses, everything would be just fine.
Back came the fear that the self-absorbed, narrow-minded professional politicians might actually do something irrevocably stupid in the name of political ideology. And before folks could figure out what ACA actually stood for, the government had a "Sorry We're Closed," sign on the door.
Just like that, there is talk of the U.S. Government defaulting on its debt, talk of another financial crisis that would rival the Lehman debacle, and talk of a return to recession. Yes, it is true that some of the talk may be aimed primarily at garnering headlines or riling up an opponent. And yes, nobody really expects the government to default on its debt. However, the bottom line is that when the news is filled with talk of the oncoming economic calamity and pictures of stocks going down every single day, confidence takes a hit.
When Confidence Dives...
The problem is that when confidence declines, so too does economic momentum. And given the most recent dive in some of the economic indicators, Ben Bernanke's worst nightmare may be about to come alive. Take a peek at the chart below of Gallup's Economic Confidence Index.
Note the three red arrows on the chart. These arrows represent (from left to right) the declines in economic confidence seen after Lehman fell in 2008, the 2011 budget/debt downgrade debacle, and now.
What is interesting is that according to ZeroHedge, the most recent decline represents the worst three-week dive in the Gallup Economic Confidence Index since Lehman. And yes, that means that the current drop is worse than that seen in 2011.
Stocks (and Bernanke) Might Be Worried About More Than...
The point on this fine Wednesday morning is that unless the children in Washington D.C. get their act together quickly, the economy may indeed be headed for another slowdown. And from Ben Bernanke's perspective, the economy needs another slowdown - especially one that is self-induced - like a hole in the head.
All that work. All those trillions of dollars of economic stimulus. And all the creative ways Bernanke & Co. dreamed up to avoid seeing the U.S. enter a deflationary spiral may be for naught if the country's elected officials in D.C. wind up doing the unthinkable.
The good news is that unless the budget crisis becomes protracted, the economic slowdown is likely to be brief. But the bad news is that based on the gains the stock market has enjoyed this year on the back of an improving economy, the current corrective phase could become more intense. And based on the concept of the wealth-effect, this too might become a problem for Bernanke's gang of central bankers.
Finally and for the record, what is happening now in D.C. is likely the primary reason that the FOMC decided not to begin tapering its QE program in September. Again, Ben Bernanke probably is none too happy with the way things are going right about now.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. Fun and Games in Washington (I.E. the Gov't Shutdown and Debt Ceiling)
2. The Outlook for the U.S. Economy
3. The State of Fed Policy
4. The State of the Earnings Season
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Negative
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Slightly Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1640
- Near-Term Resistance Zone(s): 1680
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Neutral
- Price Thrust Indicator:Neutral
- Volume Thrust Indicator:Neutral
- Breadth Thrust Indicator:Neutral
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is very oversold from a short-term perspective and is slightly oversold from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model is negative .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: positive
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Turning To This Morning...
While the focus of the market continues to be on the games being played in Washington, the markets have responded slightly to the announcement that Janet Yellen has been tapped by President Obama to be the next Fed Chair. The White House will make the formal announcement this afternoon. In addition, we will get a look at the minutes from the previous FOMC meeting today. Traders will be particularly interested to see just how close the vote on tapering QE was last month. In the meantime, U.S. stock futures have given up half of their overnight gains on the ongoing worries about the potential for the U.S. to default on its debt and now point to only a modestly higher open.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +1.03%
- Hong Kong: -0.62%
- Shanghai: +0.63%
- London: -0.03%
- Germany: +0.19%
- France: +0.57%
- Italy: +1.14%
- Spain: +1.22%
Crude Oil Futures: -$0.20 to $103.29
Gold: -$14.60 to $1310.00
Dollar: lower against the yen, higher vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.640%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.65
- Dow Jones Industrial Average: +23
- NASDAQ Composite: +9.38
Thought For The Day...
"The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." -- Sir John Templeton
Looking for Guidance in the Markets?
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
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At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
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Tags: Ben Bernanke