Rev Shark: The Fed Bazooka
09/21/2010 8:06 AM
Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.
--Sen. Barry Goldwater
Although positive Mondays have been a frequent occurrence since March 2009, the power of the rally yesterday surprised many market players. We have already seen a very big move in the first three weeks of September, and the market had been wrestling with some significant overhead resistance at the August highs, so many investors were ready for a pullback. No particularly positive news kick-started the move, either. Once the buying started, though, the short squeeze kicked in -- along with the anxiety over being left behind -- and it was off to the races.
One of the toughest things about this sort of action is that you just can't apply a lot of logic to it. It's all about feelings and emotions, and in many ways it is actually highly irrational behavior. That is what makes the market such a challenging beast, and also so potentially profitable.
Investors, then, are now back facing a very familiar quandary. The Nasdaq has risen 12 of the last 13 days, and the market has gone from oversold and extremely negative to overbought and very positive. Can we expect this rally to continue much longer? The logical answer is "no," but logic has been proven wrong at least a half-dozen times in the last year or so.
Those with the perma-bull mentality don't have much difficult with their decisions. They simply keep believing that everything is wonderful and that stocks should continue to go up endlessly. Thus, theirs isn't a particularly helpful viewpoint, although -- at times -- it does happen to be the correct one.
The bears argue that this market is irrational -- that it's being artificially inflated, and that it's ignoring all the negatives in jobs, housing and the economy. They say we should be ready for a disaster, as market players will eventually come to their senses and run for the hills. The problem is that their collective timing is terrible. They may be right, but without proper timing the argument is useless.
Of course, the truth is somewhere in the middle. The situation is not nearly as positive as what market is suggesting right now, but it also isn't as gloomy as many of the bears would have you believe. There are currently forces at work providing momentum to the bulls, and we have to respect that and refrain from fighting it, even if we know without a doubt that matters really aren't all that fantastic.
Today, to add to the mix, we will see the latest interest-rate decision and policy statement from the Federal Open Market Committee. We all know the basic line: The economy is improving at a very slow pace, and there are still many obstacles. Still, the Fed does have a bazooka it can use, and that bazooka is known as quantitative easing. This involves little more than running the printing press and dumping dollars into the economy. That money has to go someplace, and one of the easiest places for it to flow is into the stock market.
It does seem the market highly anticipates quantitative easing -- commonly called QE -- to continue. One of the likely reasons stocks have rallied in the last few weeks is the good old saying about how we shouldn't fight the Fed, especially when it will probably use the QE bazooka and keep the cash flowing.
Ben Bernanke has made it pretty clear that this is the Fed's weapon of choice and that they won't be shy about using it, but we can't be certain of whether the Fed will keep on firing it.
So, it basically boils down to an extended and overbought market that could use a rest vs. the Fed's QE bazooka, and today's focus will be on any hints in the policy statement about the extent and timing of further QE. I suspect the market is going to chop around in front of the Fed today, and then react to the perception of what is going to happen as far as this goes.
The key will be watching the dip buyers. They haven't been able to buy weakness for three weeks now, so they have been inclined to buy very shallow pullbacks. If they start to hesitate, then the profit-taking can accelerate, but these players are usually pretty stubborn until some real weakness materializes. Once that happens they tend to lose their confidence quickly, and a slide could follow.
Watch the 1130 level on the S&P 500. That was our old resistance level, and it's now acting as major support. If the index trades back under that area, the bears will quickly proclaim a failed breakout and start to push. However, killing the recent momentum won't be easy.
We're seeing some slight selling in the early going, but it's all about the Fed announcement this afternoon, so we will just have to wait and see what happens.
