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Despite QE Taper, US Stocks Due For Correction

  • Written by Syndicated Publisher No Comments Comments
    June 23, 2013

    The media response to the post-FOMC market behavior has been dramatic. Today we’ve even been treated to some intra-Fed fisticuffs, with St. Louis Fed President James Bullard openly criticizing his colleagues for apparently giving presumably lame-duck Chairman Bernanke license to discuss QE taper timelines in his Wednesday press conference.

    He Really Said That?
    President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.

    Perhaps Mr. Bullard has aspirations for the Chairmanship and wanted to show his tilt and determination. Whatever the rationale, the post-FOMC meeting selloff in most assets could well be the beginning of a significant price discovery process, and perhaps one that is long overdue. Note that price discovery in the classic sense excludes valuation fundamentals, which my routine monthly analysis suggests are at lofty levels.

    Here is a linear chart of the S&P 500 daily closes since the March 9, 2009 trough. I’ve highlighted all declines of more than 5% between that major trough and interim highs.

     

     

    Same Data, Different Math
    Here is another perspective on the same data using a different calculation. Again with the March 2009 trough as the starting point, I’ve plotted the daily closes using a “percent off high” technique. In other words, I show successive new highs (interim or all-time) as zero and the cumulative percent declines of index closes that aren’t new highs.

     

     

    Feel The Market’s Rhythm
    The extent to which global QE has inflated asset prices is a matter of debate. The two-day selloff so far will be cited as evidence of those who see the markets as Fed-focused to the exclusion of fundamentals. As of yesterday’s close, the S&P 500 is a mere 4.85% off its all-time high of May 21st. In the rhythm of the market, we’re probably due for a more substantial pullback than we’ve seen so far, taper or not.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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