The Fed Ends QE, but the BOJ Steps In

Finally, after well over a year of printing over a trillion dollars in new money, the Fed has terminated its latest open-ended QE program. So how did the market respond—not so badly. More on why below.  The S&P500 rose 2.7% in another strong push higher on top of the huge rise in the prior week. Volatility fell back down to complacent levels, as measured by the VIX index. But volume was light—meaning, once again, this rise can be construed much more as a short-squeeze than as a wave of investors jumping back into US stocks.

In the real economy, meanwhile, things are not so exuberant. Last week, durable goods orders fell—-instead of rising as expected. And even when the volatile transportation orders are removed, orders fell instead of rising as expected. In housing, the Case-Shiller index of home prices missed expectations….prices went up a bit, but far less than experts predicted. Jobless claims were a bit worse than expected. Personal income and personal spending both missed badly, so folks are making less and spending less. And finally, the PMI services flash index also missed. On the positive side, the Dallas and Richmond Fed surveys beat expectations. Consumer confidence, surprisingly given the figures on spending and income, rose a lot. And finally, Chicago PMI beat consensus estimates.

In terms of technical analysis, the S&P500 has now jumped so far and so fast, in these past two weeks, that it’s once again seriously overbought on the daily charts. Prices have returned back up to the upper Bollinger band. In terms of trend and bull market status, the 50 day moving average—while pinching in toward the 200 day moving average—has not come close to crossing below the 200 day moving average. Also, the slope of the 200 day moving average is still rising. Until, both of these indicators change, there is no bear market.

Finally, a note on what happened last week in stock markets. Within a day of the Fed announcing the end of its QE program, the Bank of Japan announced—stunningly—a massive new QE program of its own. While this is considered a huge act of desperation by the Japanese central bank (and this is a long story by itself), the program created big spillover effects, so big that the minute the Japanese program was announced, US stock futures roared forward and haven’t looked back since. Well at least so far.

Whether this is just a short-term knee jerk reaction in the US markets remains to be seen. In the meantime, all the underlying problems in the US economy (and for that matter, in most of the world’s large regional economies—Europe, Asia, Latin America, etc.) have not been fixed.

Everyone, to the extent they realize this, is simply betting that until the equity party ends, they must be dancing on the dance floor. Everyone believes—that when the music ends….as it always has in the past—they will be able to escape off the dance floor and out of the room before any true selling panic begins. To whom will all these “savvy” investors sell their overpriced stocks when that moment arrives?  Good question.

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