NFTRH; Post FOMC

Post FOMC

The Fed has ended QE 3 as expected.

Here is the big picture view that has seen a post-2008 constant in Zero Interest Rate Policy (ZIRP) and systematic applications of QE each time the stock market took a decent intermediate correction.

sp500

Here is a closer view showing the expansion of money supplies as relates to the 2008 liquidation (QE1), the 2010 market disturbance surrounding the ‘Flash Crash’ (QE2),  and the post-Euro crisis operation, which actually began with the inflation-sanitized Op/Twist, followed by the money supply stimulant of QE3.

sp500.2

So now the stock market is left on its own with (with the aid of ongoing ZIRP).  If it is going to correct one more time before year end bullish seasonals potentially kick in, now would be the time (the coming 1-2 weeks).

While there was a news blurb that Janet Yellen talked the two remaining prominent Hawks (Fisher and Plosser) into seeing it her dovish way, the Fed by and large came out of yesterday looking ship shape, with just the right amount of tough love (ending QE on schedule) without compromising its ability to a) keep ZIRP going indefinitely and b) apply more QE down the road if it so chooses.

So it is now time for the economy to prove it is an organic one.  That is the message of the charts above.  Despite ZIRP, the stock market has flagged every time QE was terminated.  It is on the clock now.

While I believe that the charts are the charts and they tell what they tell in very clear terms, we can stay open minded.  If the economy does really take the next step up, employment, manufacturing, etc. do continue to grow, then we have reached escape velocity and the view that it is unsustainable would be proven wrong.

If not, the correlation between money supplies and the stock market that have held up thus far would remain intact and that could be quite bearish.

Gold, Silver, Commodities & Inflation

What are gold, silver and commodities telling us?  A quick look at silver this morning sees it well down in the 16’s.  Our target off the bearish long-term breakdown has been 14-16.

The conclusion is that in the precious metals, leaders to commodities and possibly eventually the greater macro markets, resolution might be coming sooner rather than later.

My preference is for sooner.  In 2008 it was easy to know what was in play, but for the last 3 years what has been in play are a bear market and some very confusing signals along the way, all the while with the Fed and its various Jawbones sooth saying the markets at every ripple.

A washout in the precious metals could finally bring the opportunity that I frankly thought would have come sooner.  But the markets move on their own schedule.  A washout is an event and while there are people playing the downside (i.e. playing the thrust of the event), my preference is to be comfortable in managing the event and then seeing what it provides for future bullish opportunity… much like 2008.

Outlook

The problems in the precious metals could very well be foretelling something negative coming down the road for the stock market.  But here we have not yet confirmed whether the play is that October spelled the end of the seasonal trouble or whether there is another shoe to drop.  We should know this or next week.

Beyond that we should realize that what we look at in real time often does not play out in a shorter time frame that may be convenient to how our brains work on a daily basis.  In other words, degrading fundamentals or not, the stock market could well take a trade-able rally into 2015 as we have been allowing for.

Again, this is pending the answer as to whether October was the correction or is another shoe (to at least test the October lows) going to drop?

The stock market is on the verge of answering that question and the precious metals are on the verge of making a 2008-like blow up.  The target on gold goes down to below 1000 and as noted, silver is 14-16.  But these are just measurements.

The bigger point is that events are engaging and as has been the case since at least the summer, cash should be the default position for most people until events and time frames become clearer.  Meanwhile, traders can plan to long or short the stock market, play the thrills and spills in precious metals and generally work the volatility.

We will just move forward and refine what is in play step by step.