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SPX, RUT, BKX: Market Ignores Fed's Doublespeak


The Fed's words seem to tighten, but the money is still loose.

The big news over the weekend came from the Wall Street Journal's report that the Fed is mapping out an exit strategy from its $85 billion per month bond-buying programs. However, it seems that concrete details on such a strategy are a bit vague or nonexistent at this point. This got a lot of play over the past few days -- but in reality, I sincerely doubt anyone was expecting massive Fed stimulus would continue completely unabated for the rest of eternity, so this news was hardly a huge surprise. And given the vagueness of the details, it seems like the Fed simply trying to remind us of something we already knew -- undoubtedly at least partially in an effort to forestall inflation. The Fed is fully aware that inflation has a strong psychological component, and can be compounded or decreased by managing the public's future price expectations.

And, if the Fed wants to continue printing money with abandon, the one thing it can ill afford is high inflation showing up within the metrics it tracks. So, counterintuitively, I am of the opinion that these types of statements from the Fed are actually efforts to continue its programs as long as possible. This Fed seems well aware of the PR game involved in monetary policy, and has engaged in misdirection before.

Along the lines of mass psychology, I actually found yesterday's headline on MarketWatch somewhat comical:

US stocks start week in red as investors consider Fed policy shift.

If you just looked at this headline, you could be forgiven for thinking the market reacted in panic to the weekend news. Instead, the S&P 500 (INDEXSP:.INX) actually closed marginally green yesterday, notching a new all-time record closing high; the Nasdaq Composite (INDEXNASDAQ:.IXIC) also closed green. Hmm, where did this "stocks start week in red" thing come from, anyway? Oh, here we go: The Dow Jones Industrial Average (INDEXDJX:.DJI) closed down a whopping 26.81 points (-0.18%), which, these days, practically qualifies as an outright crash. I can only imagine the sheer confusion experienced by retail bulls across the country last night when they turned on the evening news and saw this strange "-" symbol in front of 26.81. No doubt Google was soon swamped with search queries as bulls sought to determine the meaning of "-" and whether it was a good thing. Maybe "-" meant the market went up even more than they expected!

Kidding aside, I've made it no secret that I think the Fed is a huge driver of this rally, so obviously we're going to need to keep an eye on this going forward. But I think some type of more immediately "negative-sounding" information will be needed before the market reacts overly significantly -- after all, right now the money is still flowing freely. It's not exactly "last call" from the Fed yet -- it's more like: "Hey bulls, the bar's eventually gonna have to close at some point, so... have another drink on us!"

Moving on to the charts -- one of the things I sometimes ask myself when I'm trading is, "Which side of the trade is harder to take right now?" I mention this because sometimes the market pulls a bit of reverse psychology on us. On the one hand, usually right about the time everyone figures the market will go up forever, it reverses. But there's another type of market, and that's the one that has everyone thinking exactly what I just mentioned, and thus looking for that "it can't go up forever!" reversal. That type of market does the exact opposite: It just keeps going up because everyone is watching for a reversal and afraid to position long. It's entirely possible this is that type of market, and until we start seeing some form of sustained reversal, I would advise bears to stay very nimble.

I haven't updated the Russell 2000 (INDEXRUSSELL:RUT) in a while. Since before Christmas, I've opined that this chart has been pointed upwards, and once it claimed 902.30, it activated an even higher target of 1000 +/-, which it's now finally approaching.

Click to enlarge

The Philadelphia Bank Index (INDEXDJX:BKX) can be counted as five complete waves, but normally we'd still expect to see it run higher before it finishes off the current wave:

Click to enlarge

SPX now looks poised to capture the preferred near-term targets from May 6. I am not ruling out the possibility that this count is too conservative, and may be more bullish than shown.

Click to enlarge

In conclusion, the market has now completed the minimum upside expectations for the wave structures, but it hasn't quite reached the price targets and there are no signs of a reversal yet -- so normally we would still expect to see the pattern continue at least somewhat higher. Trade safe.

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