Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Yesterday’s action in markets was the worst in three months as complacent investors were jolted out of their central bank induced slumber. There were a few particularly nasty issues yesterday but first let’s speak to the main catalyst – that is a Fed member speaking the truth. All of this QE action is essentially a Wizard of Oz operation – as long as you believe the magic behind the curtain, you can play along. Those who do not believe what is behind the curtain are also forced to play along – otherwise they are left behind in the dust. But Plosser came out yesterday and essentially said – hey this is a Wizard of Oz operation! I guess that level of bluntness shocked people:
Plosser, a so-called hawk who is concerned about inflation, presented a sharp critique of the central bank’s decision earlier this month to launch a third round of asset purchases, known colloquially as QE3. He said the that further easing wasn’t appropriate nor likely to be effective. In additions, the actions carry with them “significant risks” to the Fed’s inflation fighting credibility, he remarked.
Now to be sure Plosser is in the tiny minority – from what I can tell only 3 members in these meetings (Dallas Fed, Kansas City Fed, and Philadelphia Fed) are left as “hawks” and frankly the only members that matter are the big 3: Bernanke, Vice Chairman Janet Yellen, and NY Fed Bill Dudley. But again the market is not used to such language.
Technically I mentioned Monday afternoon that the market currently seems very linked to the Euro – as the Euro continues to weaken, the market is going with it. If / when there is a reversal in the Euro, the S&P 500 should go with it. That started to happen yesterday morning but reversed as the day went through.
Which leads to the second nasty issue – the market sold off on good news; in fact 3 line items (housing prices, consumer confidence, and regional Fed surveys) that all came in above expectations. This market has actually been rising on bad news for months so to see it do the inverse is something to take a note of.
Now the slope of all the key moving averages continues upward and until they flatten or reverse down, especially the 50 day moving average, bulls still have the benefit of the doubt but a distribution day as we saw yesterday is something to take a note of. A series of such days within a confined period of time would be a red flag, so it will be important to watch over the next few weeks. Until (when and if) that happens it looks like a good shake out at the minimum. In fact the S&P 500 has really only come back to its 20 day moving average – it just feels like a “big move” since volatility has been very contained since early August, versus the daily 1-2% moves in May-July. Also note the market has essentially erased all of the QE3 gains with the correction since peaking a week ago Friday.
Also to be aware of is the action in Google and Apple. Google (GOOG) had an “Apple like” run in September and went a bit hyperbolic yesterday completely detaching from even its 5 day moving average. It’s relative strength index around noon was in the mid 80s, and it had been up 9 sessions in a row before the afternoon selloff. This led to an exhaustion of sorts as it reversed with everything else.
And without Apple (AAPL) we can see how the NASDAQ really struggles. At some point in the years ahead Apple the stock is going to have a bad year or at least a few bad quarters in a row and the effect on that index is going to be quite dramatic, just as that stock has held together the index for most of 2012. There has been a lack of participation in many other tech stocks (the semiconductors are nowhere to be found in this rally) yet the NASDAQ continues to levitate on the back of a few names, but especially Apple.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
