Ben Bernanke's Fed surprised the vast majority of investors Wednesday when the FOMC decided not to begin tapering the stimulus being provided to the economy via the monthly purchase of $85 billion in bonds and mortgage-backed securities.
The move came as a surprise because "Gentle Ben" has been "talking taper" since May. And since May, both the bond and stock markets have spent the vast majority of their days trying to come to grips with what "the taper" would mean.
But at the end of the day Wednesday, all the consternation associated with "the taper" had gone for naught. Sure, Mr. Bernanke made it clear that his Fed (well, until January that is) could begin cutting back on the QE program at any time. However at this point in time, Bernanke said that the FOMC did not feel the economic data was in line with what the FOMC needed to see in order to justify a reduction in their quantitative easing efforts.
Apparently the key to the decision was the "tightening of financial conditions seen in recent months." In English, this refers to the dramatic rise in interest rates that has occurred since the Fed Chairman first broached the idea of tapering the expenditures on QE. The chart below of the yield on the 10-year makes this point pretty clear.
What is ironic here is the simple fact that the move up in bond yields was in direct response to Bernanke "talking taper." While the Fed has been adamant that tapering isn't the same as tightening, bond traders didn't buy into the argument. When asked about this issue at the press conference following the FOMC announcement, Mr. Bernanke said that the Fed tried to communicate its outlook for monetary policy as clearly as possible. However, the chart of the 10-year would seem to suggest that the Bernanke gang has failed miserably on this count.
While rates were artificially low in early May and thus had plenty of room to move up without impacting the economy, the fact that the yield on the 10-year nearly doubled after talk of tapering began hasn't gone unnoticed in the mortgage market. The NAHB Homebuilder Confidence report confirmed this on Tuesday as NAHB Chairman Rick Judson wrote, "Many [builders] are reporting some hesitancy on the part of buyers due to the sharp increase in interest rates.” Therefore, it is a safe bet that at least a portion of the decision to not start tapering the QE program was out of concern over what higher rates might do to the housing market.
Erring on the Side of Caution - Still
According to the surveys, the majority of economists expected the Fed to begin tapering their $85 billion per month bond buying program. Yet, if one had been paying attention to the economic data of late, this wasn't exactly a layup call.
While the Fed has told us that they are targeting an unemployment rate of 6.5% before they would take action on rates, a great many economic reports have come in on the punk side recently. As such, it wasn't exactly a surprise to see Mr. Bernanke decide to err on the side of caution - again.
If you will recall, Ben Bernanke is one of the foremost experts on the Great Depression. Furthermore, the Fed Chairman has often expressed the view that he wants to make darn sure the U.S. does not fall into the deflationary spiral that has plagued Japan for nearly twenty-five years. Anyone who has studied economic history knows that once deflation grows roots in an economy it can be very difficult to eradicate.
So, with the economic data looking less than inspiring lately and his term coming to an end in just a few months, it is a decent bet that Bernanke convinced his fellow committee members to stay the course on the QE program - just in case.
Although Janet Yellen has been a key player in the development of current Fed policy, the bottom line is no one can be sure what next year's Fed will look like. Some have argued that the 2014 FOMC will have a much more "hawkish" roster and as such, Bernanke may be looking to squeeze every last drop of stimulus into the economy before he departs. After all, they don't call him "Helicopter Ben" for nothing!
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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. Fun and Games in Washington (I.E. the Debt Ceiling)
3. The Outlook for the U.S./Global Economy
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: moderately positive - This tells us to give the bulls the benefit of the doubt at this time.Publishing Note: I have an early meeting on Friday and will publish a morning report. Regular "State" reports will return on Monday.
Turning To This Morning...
Pre-Game Indicators
Thought For The Day...
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- Near-Term Resistance Zone(s): none
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: Positive
- Breadth Thrust Indicator: Positive
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately Positive
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.
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.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Follow through appears to be the phrase of the day as global markets took Wall Street's cue and moved higher. The decision by the Fed not to taper its QE program continues to be the focal point. However, some of the enthusiasm may be curbed at this time due to growing concerns about the U.S. debt ceiling debate, which appears to be turning more acrimonious each day. U.S. stock futures are modestly higher in the early going but off their best levels.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +1.80%
- Hong Kong: +1.67%
- Shanghai: +0.29%
- London: +1.44%
- Germany: +1.11%
- France: +0.95%
- Italy: +1.17%
- Spain: +1.01%
Crude Oil Futures: +$0.29 to $108.36
Gold: +$54.10 to $1364.71
Dollar: lower against the yen and euro, higher vs pound.
10-Year Bond Yield: Currently trading at 2.700%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.48
- Dow Jones Industrial Average: +32
- NASDAQ Composite: +6.74
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.
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Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
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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