Will The Fed Be Tapering This Holiday Season?

It looks like Mr. Bernanke may want to go out in style. Just about the time investors around the globe had concluded that there was simply no way the Fed could begin tapering the size of its QE programs before March or April of next year, it looks like Wednesday's FOMC statement put the taper back on the table.

The thinking had been simple. Given the state of state of dysfunction seen in Washington D.C., most economists had come to the conclusion that the Fed would need to keep its foot on the gas pedal to make darned sure the economy kept moving forward.

The Man Who Saved the World

Ben Bernanke will likely be remembered as the man most responsible from keeping the global banking system from collapsing during the credit crisis in 2008 and early 2009. Without Bernanke thinking outside the box - way outside the central banker box - the world's banks would have likely wound up in, well, a world of hurt.

It was Bernanke and friends that engineered the mergers on Wall Street. No, it wasn't fair. But without the swift action, the big banks on Wall Street would have all gone the way of Lehman Brothers in a hurry.

It was also Mr. Bernanke that managed to come up with creative ways to first push interest rates to all-time lows and then keep them there - for a VERY long time.

Bernanke's Plan

The idea was two-fold. First, the Bernanke Fed wanted to keep the U.S. out of a deflationary spiral. Every economist worth their salt knows what has happened to Japan since 1989, and Gentle Ben appeared to be hell bent on not letting the U.S. go down that path.

The second goal was to create a little asset inflation in housing, stocks, etc. This is also known as the "wealth effect." It turns out that consumers tend to spend more when they see their net worth rising.

Thus, Bernanke & Co. pulled out all the stops and did their darndest to keep interest rates low and the economy moving forward. And had the plans not been interrupted each of the past four years by crises occurring both across the pond and right here in Washington D.C., the plan might have worked.

But unfortunately for Mr. Bernanke and the rest of the country, Europe's debt mess and the complete and utter embarrassment that passes for leadership (on all sides) in this country has managed to test the Fed's plans as U.S. economic growth remains punk.

Still Mucking Up The Works

Despite the fact that the professional politicians in D.C. managed to avoid defaulting on the country's debt this time around, the bottom line is that the can was simply kicked down the road. And not very far as the next deadline for a budget is early December and then there are various other deadlines slated for January and February.

It is for this reason that most analysts pushed out their estimates for when the Fed would begin to taper the level of its QE purchases (the FOMC currently buys $85 billion a month of bonds and various debt instruments) from "Octaper" to March/April. With the economy still not hitting on all cylinders and the dingbats in D.C. likely to muck up the works again in a couple months, economists assumed the Fed couldn't afford to stop.

Is The Taper Back On?

However, in Wednesday's FOMC statement, the following sentence got a lot of attention:

"Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy."

In English, the FOMC was saying that despite the idiocy in D.C., the economy seems to be doing okay. In addition, this was the same language the Fed had used in September, which caused analysts to assume that an "Octaper" was on the way. Therefore, the current assessment is that the Fed may still be considering starting to taper in December.

Market Reaction Was Telling

Although the algos traditionally push the stock market back and forth in a volatile fashion after FOMC announcements, the action in the dollar and the bond market confirmed the idea that the taper just might be back on the table. While the action is stocks was tough to decipher, bond yields spiked higher and the dollar bounced up from the lows of the year. 'Nuf said.

So, while the big banks and hedge funds may have been planning on playing the "liquidity trade" for another five or six months, yesterday's statement from the Fed may be causing them to rethink their thesis. Therefore, the long-awaited pullback in stocks may start to materialize. So stick around, this just got interesting.

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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. The State of Fed Policy
      2. The Outlook for Economic Growth
      3. 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: Positive
(Chart below is S&P 500 daily over past 1 month) Intermediate-Term Trend: 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)

The State of the Tape

The Early Warning Indicators

The State of the Market Environment

Weekly State of the Market Model Reading: Positive

Thought For The Day...

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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: Positive
  
• Price Thrust Indicator:Positive
  
• Volume Thrust Indicator:Neutral
  
• Breadth Thrust Indicator:Positive
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Positive

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.