Old habits die hard.
Some day markets will be weaned off the specter of quantitative easing, but that time has not yet come. You may recall my rant about Pavlovian classical conditioning: how creatures such as ourselves develop learned responses to certain stimuli over time. Well ... the bell is ringing again, investors are salivating, and that means stock prices are rising.
This time the sounds of the bell are coming from multiple directions.
Article Category: Psychology
Old habits die hard.
The market's focus has momentarily shifted back to the Fed and the future path of short-term interest rates. The Fed will end their two-day meeting today and release a statement later this afternoon. In the meantime, we can speculate on their actions and the market's response by looking at some of the data released today.
The first thing to note is that the Consumer Price Index (CPI) fell by the largest amount since December of 2008. The headline figure declined by a seasonally adjusted 0.3%, while the "core" rate (excluding food and energy) rose by 0.1%. Over the last twelve months consumer prices have risen by an unadjusted 1.3%
It's been a quiet week for the broader equity market as the S&P has done next to nothing. In the chart below, you can see that the last four bars in the chart don't look like bars at all, but rather plus signs, or doji's (green circle). I've talked about these before as they indicate a market that is directionless and perhaps at a point of capitulation.
Notice that in recent weeks the upward momentum from this latest rally has slowed. The doji's appear when a series of events take place: First, the market opens very near to the prior day's close. There are no gaps up or down as traders are content to see prices open at yesterday's closing levels. The flat open is followed by both buyers and sellers fighting to move the market, but to no avail. During the trading session buyers will drive the index higher, but this upward movement is met with an inflow of sellers to knock the average back down to even. Excessive selling will also push the market below the opening levels, but then this move is met with an inflow of buyers, driving the price right back up to where it opened.
Let's take inventory of where the major averages sit. The Industrials have now recovered to the point where I believe it's fair to say that the initial correction from previous highs is complete. We've put in the initial correction lows that will now act as our bearish trigger. For the Industrials, that line in the sand comes in at 16,100. A rise above 17,280 would put us back to new closing highs, and if confirmed by the Transports would give us a reconfirmation of the bull thesis. Those two scenarios are outlined below using the green and red arrows.
Yesterday's selling was eerily broad based. Every sector was deep in the red, and the usual safehavens, gold and Treasuries, both declined as well.
It's easy to find something to blame the selling on ... fighting in Ukraine or Gaza, increased sanctions, European deflation, Argentina's default, Portugal banking worries, US inflation concerns, poor earnings and guidance from major companies like Adidas ... take your pick.
With so much action it's difficult to figure out what matters and what doesn't. Every event plays a role since it affects the psyche of investors, but what are the dominant themes? Here's my take, for what it's worth.