It appears that traders have now come back to the view that the loudest voices in favor of cutting short the extent of QE were coming from the NON-VOTING members of the FOMC. The talk now has become that the VOTING MEMBERS are not going to cut anything short anytime soon.
I expect Bernanke to say as much in this coming week's appearance before the Congress on Tuesday and Wednesday.
If that is the case, and Ben issues soothing words to the crack addicts, then expect the equity bulls to go right back to doing their thing and driving stock prices relentlessly higher. If he even hints at some sort of agreement with the early cessation of QE, then Katie bar the door for stocks. We will certainly be watching very closely to see how the precious metals respond to this.
Notice the chart below - I have set up two indicators for you to observe. The first is the ADX or Directional Movement Indicator that it is more commonly known by. The black line is the ADX. IT rises in a trending market and falls when the market is not trending or in the process of consolidating (market tends to move sideways). Note that the BIG DOWNSIDE REVERSAL pattern in the S&P 500 that I noted earlier this past week caused that line to finally turn lower. That indicates a break in the uptrend. That being said, there is still no sell signal in this indicator. At this point it is indicating a pause, nothing more.
Normally, one of the most powerful technical indicators is one of these downside reversal patterns that come on huge volume. Typically they portend the end of an uptrend, especially one of such long duration and one which has experienced such few corrections over its course. To witness the eagerness of buying which we saw Friday is therefore no mean thing! You talk about "animal spirits" of investors. These guys are so juiced up that they could power light bulbs with their bare hands!
Note also the indicator below which I will leave nameless for the time being. It basically measures momentum. What I have been watching since the rally at the beginning of the year has commenced, has been the loss of upside momentum even as this market has made one new high after another. In other words, this market keeps grinding higher and higher and higher even as more and more momentum or upward energy is dissipating. I get the sense of a market that is at levels that are so ridiculous that more and more traders are getting increasingly nervous yet no one wants to aggressively sell the thing out of fear of the Fed's punch bowl.
We have seen what will happen to this "national security concern" if it believes that Uncle Ben is going to beginning preaching the virtues of monetary sobriety. Is there anyone out there who genuinely believes that the Fed is going to make sure that it crashes the stock market? Just who is in control here - the investing/trading class which just pitched a hissy fit over the FOMC minutes or the Fed which has now become captive to its own QE program.
Think about what we are witnessing here - The nation is addicted to cheap money as much as it is addicted to hedonism and vice and yet the Fed cannot pull the plug or more aptly, cut off the supply of the drug for fear of killing the patient. Our political leaders cannot cut a measely 2 pennies out of a dollar's worth of spending without telling us that Armageddon is about to occur; the madman running N. Korea is working on intermediate range nuclear missles and is even disturbing its only ally, China by so doing; Gasoline prices are topping $5.00 in some locales; Social security tax increases are hitting the entire working population and further scrimping already dwindling disposable income; health care costs are going UP not DOWN as we were assured that they would be once the grossly misnamed "Affordable Health Care" act was deceitfully rammed through Congress; we've got surveillance drones flying all over the damned country spying on us and yet everything is just peachy keen...
I have said it before and will say it again as much as it pains me to do so; America is going the way of ancient Rome as surely as the sun rises in the East. The Fed is doing the modern version of coin clipping. What is next, price controls under edict of death for merchants who hike them? No worries however - the stock market is rising so all is right with the world.
