The Decline is Again in Full Force – Precious Metals Slide Lower – Dollar/Euro is Crushed – Bonds Are For Sale and Nobody Wants Them
Fed Chairman Bernanke came he saw, he spoke, and the markets began to slide. When Asia and then Europe took over the selling spread more heavily to the Euro, Yen, Gold, Silver, Platinum, and Treasuries. As I write this (1:30 AM PDT) it is ugly out there. The DJIA is off 72 after being down 85, the S&P 500 is off 10.25 after being -11.50, the Russell 2000 is -7.80 up from -8.80. Gold is down $60 which is up from -$70. Silver dipped below $20 – Treasuries appear to be back in free fall – the 30-year is down 1 point and broke below the 137 handle – the 10-year note is off almost a point honing in on 127. And the U.S. is still 5 hours from opening.
All this being predicated by the FED giving a presumed end date to quantitative easing and from what I can read it remains 2015 to 2016 – but (there is always a but) should economic conditions improve more rapidly or if inflation does remain under control (as if)- and unemployment falls to below 6.2% (as if) then the FED may take action to curb asset purchase and move the Fed Funds Rate. Most of the Board members and Reserve Bank presidents expect moderate growth picking up over time and gradual progress toward levels of unemployment and inflation consistent with the FED’s statutory mandate to foster maximum employment and price stability.
Then came the supposed bomb – the addressing of current policy – the bane of the bull market’s existence and either the markets expectations were so out of whack or the global markets just don’t believe Mr. Bernanke but it got ugly very quickly.
I continue to say that that Status Quo is changing and if the markets are forward thinking than the current thought is not as rosy. It is a correction, so for me as a market participant what will be more important is how support levels will handle the selling momentum.
With the break in the 30-year bond putting a scare into the balance of the markets from equities to precious metals to forex there will be much attention to just how far bonds will drop. I suspect that there will be volumes spoken on it being the “end of the bull market” and for that matter the “end of life as we know it”. But again, I just don’t have the same opinion.
Can my opinion change – yes of course – but based on current analysis and market patterns it remains a correction, one that in equities began in May 2013, Treasuries in 2012, Precious Metals in 2011.
From Mr. Bernanke’s transcript (I have edited for size):
Before turning to today’s policy decision let me say a few words about the Federal Reserve’s strategy for normalizing policy in the long run. I will note that, in the view of most participants, the broad principles set out in June 2011 remain applicable. One difference is worth mentioning: While participants continue to think
that, in the long run, the Federal Reserve’s portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell agency mortgage backed securities (MBS) during the process of normalizing monetary policy, although in the longer run limited sales could be used to reduce or eliminate residual MBS holdings. I emphasize that, given the outlook and the Committee’s policy guidance, these matters are unlikely to be relevant to actual policy for quite a while.
…However, the target range for the federal funds rate, currently at 0 to 1/4 percent, cannot meaningfully be reduced further. Thus, we are providing policy accommodation through two alternative methods: (1) by communicating to the public the Committee’s plans for setting the federal funds rate target over the medium term and (2) by purchasing and holding Treasury securities and agency mortgage-backed securities.
First, today the Committee reaffirmed its expectation that the current exceptionally low range for the funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, so long as inflation and inflation expectations remain well-behaved (in the senses described in the FOMC’s statement). As I have noted frequently, the phrase “at least as long” in the Committee’s interest rate guidance is important; the economic conditions we have
set out as preceding any future rate increase are thresholds, not triggers.
In the projections submitted for this meeting, 14 of 19 FOMC participants indicated that they expect the first increase in the target for the federal funds rate to occur in 2015, and one expected the first increase to occur in 2016.
The purpose of this forward guidance about policy is to assure households and businesses that monetary policy will continue to support the recovery even as the pace of economic growth and job creation picks up. Importantly, as our statement notes, the Committee expects a considerable interval of time to pass between the time when the Committee will cease adding accommodation through asset purchases and the time when the Committee will begin to reduce accommodation by moving the federal funds rate target toward more normal levels.
The second policy tool being employed by the Committee is asset purchases—specifically, the Committee has been purchasing $40 billion per month in agency mortgage-backed securities and $45 billion per month in Treasury securities. When our program of asset purchases was initiated last September, the Committee stated the goal of promoting a substantial improvement in the outlook for the labor market in a context of price stability, and noted it would also be taking appropriate account of the efficacy and costs of the program. Today the Committee made no changes to the purchase program.
Although the Committee left the pace of purchases unchanged at today’s meeting, it has stated that it may vary the pace of purchases as economic conditions evolve. Any such change would reflect the incoming data and their implications for the outlook, as well as the cumulative progress made toward the Committee’s objectives since the program began in September. Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time.
If the incoming data are consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains—a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program. It’s also worth noting here that, even if a modest reduction in the pace of asset purchases occurs, we would not be shrinking the Federal Reserve’s portfolio of securities but only slowing the pace at which we are adding to the portfolio, while continuing to reinvest principal payments and proceeds from maturing holdings as well. These large and growing holdings will continue to put downward pressure on longer-term interest rates. To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.
Here again, the equity markets also remain in corrections. Intervening rallies are complete and the next leg down is underway.The charts (daily) below continue to indicate support to complete the corrections lies well below current levels. I would anticipate a few “ugly” days of downside activity. Longer-term I still believe the broader indexes will move to additional new highs before the advance is complete.
It is interesting times in which we live and choose to trade. I have advocated changing strategies as a trader in becoming more of a day trader (no overnight risk) versus carrying positions. This remains important during times such as these. When the dust settles it will be important to have the cash to invest for the next move.
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My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.
The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).
Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:
- DJIA future (e-mini available) – Highly recommended
- S&P-500 future (e-mini available) – highly recommended
- Russell 2000 future (e-mini available) – highly recommended
- NASDAQ 100 future (e-mini available) very highly recommended
- US$/Euro futures (e-mini available) – very highly recommended
- GS (Goldman Sachs) – good two way volume –
- AAPL (Apple Computer) – very highly recommended
- GOOG (Google) – very highly recommended
- LNKD (LinkedIn) – solid intraday range
- NFLX (Netflix) – solid intraday range
- TSLA (Tesla Motors) – highly recommended
- 30-yr Treasury Bond future – did not get quiet – opposite took place
- 10-yr Treasury Note future
- TLT (Treasury Bond Long ETF)
- TBT (Treasury Bond Short ETF)
- Gold (futures and ETF – GLD)
- Silver (futures and ETF – SLV)