Thursday, June 20, 2013

Negative reaction to the FOMC statement

The equity market dipped after the release of the FOMC (Federal Open Market Committee) statement and the Bernanke press conference.  More specifically, S&P 500 closed down 22.88 points, or 1.39%.  

In our opinion, the behavioral and psychological strategy implemented by the Fed is coming back to bite it you-know-where.  It has gotten to a point where every word that is said or printed will move the market.  As an example, just because the word "taper" or "tapering" was not in the statement, the market's reaction to FOMC was positive initially.  

Even so-called journalists with their so-called close ties and connections with the Fed (which is just another part of the psychological plan, similar to the government's very consistent and timely 'leaks') are becoming stars for posting market-moving articles about what might be said by Bernanke.  

Unfortunately for the bulls, even though tapering was not used, the Committee did state that it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall."  Simply put, this means that the necessity for further easing is diminishing.  The Fed won't just turn it off tomorrow, but it is trying to tell the market, in a very nice way, that we are getting closer to pushing that 'off' button.  Yes, the quantitative easing will continue, but probability of tapering continues to increase.

However, although the Fed stated that risks to the economy have gone down, we note that many of the latest numbers indicate a slowdown.  For this reason, we think the Fed is stuck between a rock and a hard place.  Returns on such unprecedented easing, in economic terms, are not something to write home about.  Certainly, the stock market has hit new highs and commodity prices are increasing again (not mostly driven by higher demand), but economic figures are giving us a different story.  Of course, the Fed remained consistent in blaming the lawmakers for the slow economic growth by saying "household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth."

FOMC's projections are below.

           Source: Federal Reserve Board and FOMC (

As you can see above, FOMC tightened the range of real GDP growth for 2013 by lowering the high-end of the range.  It did the same for 2015.  However, it upped its 2014 estimate, and did not change its "longer run" estimate.

The table above also shows that unemployment estimates for 2013 - 2015 were brought down slightly, which is good news; but not good for the QE-driven equity market.  

With the slightly more optimistic real GDP and unemployment projections, we were surprised to see that the FOMC actually lowered its 2013 - 2015 inflation estimates.  Just by looking at the 2014 GDP and unemployment revisions (of which, both indicated more optimism), one would think that headline and core inflation would also move up; but again, the FOMC expects inflation rate to actually decline.  

We may be wrong, but in our opinion, such 'discrepancy', could be a sign of the Fed being really stuck in a tough situation.  It appears that while it wanted to let the market know that it thinks the economy is improving, it also wanted to make sure the market understands that just in case it does not, given such low levels of expected inflation, it can continue its QE policies.

From a technical standpoint, S&P 500, closing at 1628.93, remains within striking distance of going below its linear regression level of 1625.  In addition, although it stayed above its 1616 50-day EMA, it did dip below the 1635 10-day EMA level.  It appears that 1610 is the next support level.  Lastly, after Tuesday's nice gain, it looked like the MACD was on its way to reversing its downward trend, but today's decline, put a stop to that, at least for now. 

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