The drug’s being unplugged: now what do we do?

June 20, 201310 Comments

During Bernake’s post-FOMC meeting speech yesterday, it was implied that the Fed plans on ending U.S. Treasury purchases by the end of 2013 and end its MBS (mortgage backed securities) purchases by next summer. I have mentioned in the past, as have others, that the monetary stimulus measures introduced by the Fed (low rates, QE 1, 2 & 3, “operations twist”) have acted like crack cocaine for the markets- which in turn have become addicted to the drug. Proof of this addiction lies in the reaction to yesterdays speech – which pushed markets to decline. I note that today is another markdown. 

 

I truly doubt that there is much chance of a near termed rally from here. The shock by the addict (market) facing withdrawal, along with the usual seasonal tendencies for markets to be soft until the fall creates an unfavourable risk/reward potential for at least the very near term. I’ve reprinted a chart that I’ve posted on this blog numerous times concerning the market patterns surrounding the QE programs.

The question in my mind is not “will it fall”, but “how much will it fall”. And to answer that question, I turn to the charts. 

 

 

The first key level for the S&P 500 is an intersection near the 50-day moving average at just over 1600. This has represented firm support on a number of occasions including the past two weeks– that level may crack today (we’ll see). The next support level is the 200-day moving average currently at about 1500 on the S&P 500. There is some traditional technical support that comes in around 1540 then 1475. This intersects with the trend line that began in early 2009 (not shown). I suspect that 1540 or – at worst – the 200 day MA level of 1500 will hold, but will wait to see before making any bold predictions. Meanwhile, regular readers of this blog will know that I continue to hold the 40% cash that I raised in April.

Is the party over?

If you, like me, have been holding some cash – your patience is likely to be rewarded over the next while. I believe that the market will remain in a long termed bull trend. It should be considered as bullish in trend until/unless the last major low , which lies around 1350 for the S&P 500, is taken out. In the near term, there is a correction pending.  A bounce off of the moving averages or support levels mentioned above should imply a superb buying opportunity in the coming weeks or months. I, for one, am looking forward to this opportunity!

10 Comments

  • KEITH,

    THANKS FOR YOUR BLOG ON TLT AND “FALSE BREAKOUT” ON $WTIC (AND XEG.TO). I HAVE TWO MEANIGFUL CHART THAT I WOULD LIKE YOU TO COMMENT:

    $VIX: “POTENTIAL REVERSE HEAD AND SHOULDERS PATTERN TARGETS TO 25 UPON BREAKOUT ABOVE THE NECKLINE AROUND 18”

    $TNX: “10 YEAR YIELD SITTING ON PREVIOUS RESISTANCE AT 2.1%”( 2 YEAR CHART)

    Reply
    • Jean-Pierre – its too early to call a H&S bottom on the VIX – the bigger picture is lower highs and lows since mid 2011–a breakout through $22.50 or so would imply a break to theat trendline, and a H&S bottom
      TNX has major resistance going back to 2011 (24-ish) that needs to be broked before one gets too convinced of non-stop rising rates

      Reply
    • Yes–I own it. Ouch…interest sensitives have been hardest hit, but figured it would find support at $15 as it has many times before. Seasonally it can be ok in the summer–but probably not this time.

      Reply
  • Hi Keith,
    Do you think we have seen the 5-10% correction & start deploying cash OR there is more downside to come esp on interest sensitive stocks/etf.
    On sectors maybe you can blog on high yielding stocks/etf eg utiities,telco,reits, lifecos etc next time

    Reply
    • See my blog today Montazir. Bottom line: look for the 200 day MA as support before getting too excited about buying.

      Reply
  • But with ZUT hovering just above 14$ (and currently yielding 6%), could now be the time to get into it? Or will the summer-swoon likely continue to lower the tide for all boats?

    Reply
    • Andy–as you know, I own ZUT. Ouch. Its broken down, and the TA in me says sell. The only thing that keeps me in is (oh, oh…confirmation bias coming up…) the fact that virtually every sector and asset class has broken down. So, I wonder if this is just one more sector thats bound to rally after the market finishes this correction– utility stocks represent a more conservative group of companies (Just Energy and Atlantic Power aside…) so I am stubbornly, perhaps stupidly, holding the darned thing. Its 5% of my portfolio–demonstrating yet another reason to diversify.

      Reply
  • Keith,

    I’m a big fan of your work and follow your advice closely.

    you’ve mentioned that your holding 40% cash. When the buying opportunity comes to deploy this cash what areas would you be looking to buy?

    Reply
    • Thanks John
      I have a rather large “shopping list” of stocks that need to reach (and bounce off of) support levels before I buy. I wont give the whole list away, but a few names include the good ‘ol index ETF’s (at my support levels for the S&P–after a bounce to prove support holds), Canadian banks, and a few underappreciated “growth” stocks. But its too early to get excited–we need to fall, bounce, and prove the end of a correction before catching the falling knife!!

      Reply

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