Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Some quick notes:
- Futures down moderately after yesterday’s outside day. The extreme overbought conditions on the weekly and monthly index charts are finally relenting some. Even uber bulls would prefer solid entry points on stocks rather than chasing constantly. The S&P 500 had not touched the 10 day moving average since May 2nd, until yesterday – a not common situation. In theory the S&P 500 could go all the way down to 1597 – which was its primary breakout level – and still be in decent condition, but surely dip buyers trained in Pavlovian fashion wait much earlier. In fact as I type they have already cut losses substantially.
- The Nikkei has a lot of attention by the media as it was punished to the tune of 7%+ overnight. The same media fail to mention it was up over 6% last week alone. This drop knocks YTD gains down from 50% to 40%. So it seems like a major move but in the context of the mega rally it is relatively little. It could drop another 10% next week and still be in a bullish position intermediate term. It trades like Tesla nowadays. Probably more interesting is the sharp rise in Japanese bond rates. In theory this is what the Japanese want since it would signal inflationary pressures – but controlling the pace of increase is not something easily done and it’s been a huge jump in a short amount of time. (essentially a double to the 1% range)
- China’s flash PMI fell below 50. Don’t know if it matters in this market as liquidity has trumped everything.
- With the holiday, Tuesday is only 2 market days away – and we know markets are no longer allowed to go down on Tuesdays.
- Ironically the “worse” any of this news is, the less likely there is any QE tapering, so it’s circular in logic. The reason for the selling is QE tapering in theory but bad market reactions means QE tapering pushed off.
- As to the word tapering people need to rethink the terminology. It is more of plateauing. To reach a stable level; level off. The QE level is the new fed funds rate. A move in any direction does not portend additional moves in that direction. The Fed has made this clear the past few weeks. So they have it at the $85B plateau. Next could be $70B or $100B plateau. They will move QE there and then hang out at that plateau for a while to see how the economy acts. Then they will move QE again one way or the other to another plateau – and continue to rinse, wash, repeat. The market is improperly thinking once the first reduction comes it will lead to a long series of future reductions – but the Hilsenrath, along with recent speeches are signaling otherwise. Hence taper is a misleading term.
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