Central Banks: the “Buyers of First, Last and Only Resort”

In a stunning development, the US equity markets were allowed to dip last week, so the S&P500 managed to shed 0.5% on rising volume. Volatility rose, as one would expect when prices actually do manage to fall. Breadth was bearish; the McClellan Oscillator eroded markedly, as did the new highs-new lows weekly index. So while market prices are near their highs of the year, the market internals are not following along.

Meanwhile the US economy continues to limp along. The Chicago Fed Index, existing home sales, initial jobless claims, and durable goods orders (ex-transportation) all disappointed by missing consensus expectations. And while new home sales were slightly better than forecast, those sales came at the expense of prices which fell 2.5% on a year-over-year basis.

Technically, the S&P500 is still very over-bought on the daily charts. And as noted, the behind the scenes, market internals are not healthy or strong. It appears that the US equity markets are poised for a greater pullback, if only prices were allowed to fall.

ZeroHedge summed up the situation very concisely. Today’s “new normal market….has long since given up discounting fundamental news, and merely reacts to how any given central banker blinks, coughs, sneezes or otherwise hints on future monetary injection plans…” “It is in this playing field where the price of any one ‘risk asset’ is no longer indicative of anything more than monetary, and in a world in which politicians have long been made obsolete by central planners, fiscal policies. It also means that capital markets are only whatever the various central bankers want to make them….and nothing else.”

And that is certainly the prevailing belief in the US equity markets today, namely, don’t worry about being long stocks or buying more on dips, because the Federal Reserve will never—never—permit prices to fall very much, and certainly will never let them crash.

So there’s nothing else to do except buy! Bad economic news? Buy, because that will only spur the Fed to pump in more monetary stimulus. Bad corporate news? Buy, because the Fed has your back on this little problem too. And if good economic news gets announced? Well, then buy even more because then the fundamental dictate that you should take on more risky assets like stocks.

In short, always buy. Never sell. All will be good.

And whatever you do, pay no mind to all the actual market crashes that have occurred under the Fed’s watch over the last 99 years, especially the most recent two crashes over the pat 10 years where prices collapsed by over 50% in each case.


Because this time is different. The Fed has gotten smarter and better at supporting the markets. The Fed won’t let pesky things, like crashes, happen again.

We’ll see.

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