Limits to Fed Printing?

In a shocking surprise, the S&P500 closed the week without its customary melt-up. Despite a valiant effort on Friday, the S&P closed down 0.28%. Volume was very light, partly due to the holiday shortened week. Volatility, as measured by the VIX, jumped notably, climbing almost 14%. Still, despite the jump, the overall level of the VIX is close to historic lows. Market breadth deteriorated slightly. The McClellan Oscillator, and the Summation Index, and the percent of stocks above the 50 day moving average all deteriorated for the week, suggesting that whatever strength there was came from a narrow band of leaders rather than a broad participation.

US macro news continues to disappoint. The housing market index missed the consensus prediction; what’s worse is that this was the first drop and miss since April 2012. Housing starts missed as well. Inflation, at least as measured by the ever changing metrics of the BLS, came in at mild levels. Initial jobless claims were slightly worse than expected. The flash PMI manufacturing index disappointed. Existing home sales essentially met expectations. The Philly Fed survey, in the most shocking number of the week, collapsed. Instead of rising to 1.1 as expected, it dropped to -12.5. And finally, leading indicators also missed.

Technically, the S&P—despite the miniscule drop—is still severely overbought, on both the daily and weekly resolutions. The US stock markets are near record highs, despite fundamental weakness in the overall economy and the corporate sector, and are extremely ripe for a 5%-10% technical correction, at the very least.

The question all the bull seem to be ignoring is—is there any reason that the Fed can’t just keep printing to infinity and as a result, keep pumping stock prices further, prices that even regional Fed president Dick Fisher admitted are artificially boosted by the Fed’s programs?

Well ZeroHedge has pointed to one key metric that seems to have shackled the Fed, somewhat, over the past few years, and will certainly be an obstacle going forward.

Since the Fed cannot perfectly control where it’s trillions of printed money flows, it must be careful not to inflate prices of consumables that the average person needs on a day-to-day basis.

And as much as the Fed wishes to pump, and has succeeded in pumping, the stock market (and the stock market alone) the Fed is pumping up the prices of critical items such as food and energy, the cost of which directly affect the well being of millions of average Americans who do not benefit by the endless melt-up in the stock market.

Specifically, ZeroHedge has noted that whenever the average price of gasoline has hit $3.80, the Fed has pulled back on its easing, allowing gas prices to deflate, as intended.

The unintended result is that stock markets have pulled back too….each and every time.

Last week, unfortunately, US gas prices have once again crossed over the dreaded $3.80 level. What’s worse is that this has happened as all wage earners have been hit with a rise in their payroll taxes.

Will the Fed respond the same way as it has in the past, by easing off the pedal, to allow gas prices—-and stock prices—-to fall back?

We’ll know soon. And if not, expect a huge wave of negative publicity as the depressed masses of the nation cry out over $4.00 – $4.50 gas.

One thing or another MUST give. The Fed can’t have it both ways—high stock prices and low gas prices.