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!