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Fed Talk Achieves Objective, But Now What?

  • Written by Syndicated Publisher No Comments Comments
    May 25, 2013

    As I said in Tuesday’s post, the Fed is in a difficult corner right now.  With the economic slowdown continuing, the Fed has to be hesitant about actually beginning to remove the punchbowl.  But at the same time, it wouldn’t want to take a chance on keeping the spigot open too long and creating another bubble in the stock market. So the Fed is more likely to resort to talk again, and indicate that it is preparing to dial back the stimulus, in hopes of taking some of the exuberance out of investor euphoria. But I seriously doubt it will actually do anything but talk as long as the economic recovery continues to stumble. Historically, it has accomplished its goals through talk, hints, and promises much more often than it has actually taken action.”

    And I believe that is just what we saw this week.

    Bernanke threw a scare into investors, not just in the U.S. but globally, with talk of perhaps beginning to dial back the stimulus as soon as in upcoming FOMC meetings.

    So what’s next?

    I believe the Fed would not mind seeing some of the exuberance and euphoria come out of global stock markets, which have been somewhat disconnected from the reality of slowing economies and earnings. The disconnect has been solely due to markets being convinced that central banks have their backs, and that the so-called ‘Bernanke Put’ remains in place.

    But that the Fed will actually begin dialing back stimulus is probably an empty threat for now, an attempt to cool the market off some with talk. In each of the last three summers when the economic recovery stumbled, the Fed rushed in with more stimulus and it worked to recover the economy from the stumble and keep it going.

    It’s very doubtful it would take the opposite approach this time and remove stimulus. That will not become a serious threat until the economy shows signs that it is recovering from the stumble.

    But yesterday does bring an interesting new wrinkle into the situation.

    Markets are likely to begin seeing any positive economic reports that show up, particularly in the areas of the Fed’s biggest concern, the employment picture, as negative for the market, since they would be taken as confirming that the Fed can and will begin removing stimulus and raising interest rates sooner rather than later.

     

    A classic key downside reversal day.

    As I tweeted to my Twitter followers yesterday, the day was shaping up to be a classic key downside reversal day.

    The S&P 500 spiked up to an intraday high substantially higher than the previous day’s intraday high, and then reversed to the downside into negative territory. If it closed below the previous day’s intraday low that would complete the reversal. But it would take a close below 1,660 to do it. And it closed at 1,655.

    But for it to potentially mean anything there has to be immediate follow through the next day.

    And those global collapses are dramatic.

    To read my weekend newspaper column click hereThe Last of the 2008 Doomsday Scenarios Is Fading Away!

    Subscribers to Street Smart Report: There is an important hotline from 7:30 this morning, in addition to one from last night. And there is an in-depth ‘U.S. Stock Market Outlook and Recommendations’ report from late yesterday, in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author

     

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

     

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