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Did Santa Bernanke Scare-Off The Grinch?

  • Written by Syndicated Publisher No Comments Comments
    December 20, 2013

    The Fed’s decision to begin tapering QE stimulus was surprising since 70% of economists and analysts did not expect it at this meeting, and the market’s positive reaction to the announcement was perhaps just as surprising.

    After all, it was just on and off again hints that it might begin tapering that created all the market downturns since May, which were only halted when the Fed rushed in with ‘no taper’ decisions and assurances. And the market spikes up almost 300 points when it does decide to act?

    But in his press conference Chairman Bernanke did a masterful job of turning the news positive, by offering much more dovish forward guidance; a promise to keep interest rates extremely low by other means for several more years, probably into 2015; assurance that the reduction in QE purchases in January will not necessarily be the beginning of a continuing monthly basis, but further tapering steps will be determined each month based on the strength in the economy; that unemployment getting down to 6.5% which was its previous target for when it might consider raising rates, is out the window, that it will have to be well below 6.5%, and will also be conditional on inflation remaining below 2.5%, and so on.

    It’s hard to know if it was a one-day wonder reaction, or is the beginning of another leg up.

    Today’s action won’t reveal the answer, since profit-taking by short-term traders after a two-hour 292 point spike-up would be normal and expected.

    But it was potential good news that the correction most everyone expected potentially found support at the first level of potential support we were watching, the 50-day m.a.

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    We did expect the trendline would be the most likely support. And that may still happen.

    But we were happy to see the correction may have ended, since our Seasonal Timing Strategy remains in its favorable season and 100% invested in the Dow, and our non-seasonal Market-Timing Strategy remains on its October 23 buy signal.

    121913d

    Unfortunately, although the pullback alleviated the previous short-term overbought condition above the 50-day m.a., the apparent end of the pullback so soon did nothing to alleviate the risk in the U.S. market from the longer-term overbought condition above the 200-day m.a. (not shown), or to cool off the high level of investor bullishness and optimism.

    It does play into our expectation that 2014 will not be anything like 2013, which may be a shock to investors who have become so confident after such an unusual year as 2013 has been.

    The average decline within the second year of the Four-Year Presidential Cycle going back to 1934 has been 21%. The declines tended to be worse when there was no correction in the first year of the cycle, and when conditions had become very overbought as a result.

    That’s the bad news for next year.

    The good news is that since at least 1918, there has been a significant rally from the year’s low to the high the following year, a rally in which the Dow gained an average of 50%.

    So we believe our work is going to be important and critical next year.

    Bad News For Underwater Home-Owners.

    In Tuesday’s blog I noted the good news for home-owners underwater on their mortgages. In the third quarter almost 800,000 more residential home-owners saw their home value/mortgage equation tick up into positive equity.

    But there’s not so good news for the 6.4 million who are still underwater, or even those no longer underwater but struggling to meet mortgage payments due to losing jobs or seeing their income drop in the slow recovery from the recession.

    For quite some time accountants have been warning their clients with underwater mortgages that they were running out of time and needed to pick up their pace if they intended to take advantage of the little known ‘Mortgage Forgiveness Debt Relief Act’.

    Background: The IRS does not consider money received from a loan as taxable since the loan is expected to be paid back. However, if a loan, or any portion of it is forgiven, the portion that was received and will not be paid back is considered to be taxable income.

    As part of the recovery efforts after the bursting of the housing bubble and ‘Great Recession’, the ‘Mortgage Forgiveness Debt Relief Act’ was passed, which waived income taxes on the income realized by having a lender forgive part or all of a mortgage loan.

    The bill was extended twice, each time for one year, to give home-owners more time to act, but the act is due to expire December 31, and there is little to no chance that home-owners will be given still more time to take advantage of the opportunity.  

    So, beginning with the new year, home-owners could face a hefty tax bill if they take advantage of selling their house in a ‘short sale’ for less than their mortgage balance, lose their home in foreclosure, or succeed in having their mortgage balance modified to match their lower income.

    Tax attorneys say the IRS will probably be willing to work out a payment schedule for the taxes, but will be unlikely to waive taxes owed on forgiven mortgage debt. 

    To read my weekend newspaper column click here: Three Stocks To Avoid

    Subscribers to Street Smart Report: NOTE: An important hotline and the new issue of the newsletter from last evening are in your secure area of Street Smart Report.com.

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    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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