PM: Do we need the Fed?

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks recovered Friday’s selloff and finished near recent resistance at 1640.  Volume was higher than Friday, but below average.  Technical support is back at the 50dma and 1600 while near-term overhead resistance is 1640 and 1649.

MARKET SENTIMENT
Everyone is waiting on the Fed.  Will Ben restate his unwavering commitment to easy money, or drop hints at the eventual unwinding of QE.  Personally I don’t think it matters.  Recent selloffs in our equities and bonds as well as the implosion going on in Japan shows central banks really don’t have as much control over the markets as people give them credit for.  The only reason Ben has been successful at keeping rates low and inflating equity prices is because investors are willing to go along.  An analogy would be a four-year-old walking a huge dog.  As long as the dog is listening to the little girl, everything works great, but as soon as that dog spots a rabbit, there is nothing the girl can do to stop him.

Now many will use this argument to say the markets will spiral out of control, but I’ll take the other side and say the markets are at these levels not because of the Fed, but because they want to be here.  Fed or no Fed, the market likes these levels.  This is even more true with the recent pricing in of the eventual end of QE.  Everyone who fears an imploding market upon the withdrawal of QE is already out.  Everyone left is far less worried about it simply by the fact they continued holding through recent volatility and uncertainty.

Without a doubt an unexpected and abrupt end to QE would shock the system and trigger a huge wave of panic selling, but Ben and the rest of the Fed members know this.  These subtle hints from the Fed are one way to help the markets begin the transition by letting us gradually price it in.

TRADING OPPORTUNITIES
Expected Outcome:
It would be surprising if Ben or the Fed came out with something that spooked the market.  Between the recent equity and bond selloff, they will be walking on eggshells because they don’t want to let a stray comment undo all the progress we made over the last year.  The Fed’s mandate is unemployment, but they understand the relationship between the markets and business leader’s confidence about the future.

Alternate Outcome:
The only reason stops exist is to protect us when we are wrong.  No matter what we think, we must have a good defense.  A swift selloff under the 50dma and 1600 moves us to a highly defensive posture.  No matter what happens, it is better to be out of the market wishing we were in, than in the market wishing we were out.  I don’t mind seeing the market bounce after a defensive sell because I fully appreciate all the times it saved me.

Trading Plan:
Expect volatility to continue, but most of the selling is already behind us.  The market remains holdable until we approach the upper end of the trading range.  Use the 50dma as a trailing stop.

Plan your trade; trade your plan