Adam There are a few factors that are occurring behind the scenes. First, emerging markets are trading over the map which is spooking developed markets. Second, and the more important reason, is that the Fed is scaling back on QE (printing less money each month to stimulate the market and the economy).
Jim: Markets moved lower BEFORE that Fed announcement though- what do you make of that?
Adam: Ahh, great question and that is what I love about you- you know how to read between the lines and see exactly what is going on.
One day after the world’s largest investors met in Davos, stock markets across the globe began to fall- very hard. In fact, the Dow Jones Industrial Average fell almost 700 points in a few days! Large institutions (after all meeting together in Davos, not a coincidence) aggressively dumped stocks a few days before the Fed said it will taper by another $10B/each month. It is very clear that someone (or some people) knew something.
The World Economic Forum held its annual meeting in Davos, Switzerland. According to its website, The World Economic Forum is members-only and not open to the public. Its Members comprise 1,000 of the world’s top governments, corporations, banks, and global enterprises usually with more than US$ 5 billion in turnover.
The WEF is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. The WEF was incorporated in 1971 and is headquartered in Geneva, Switzerland.
Again, these are the facts, I’ll allow your readers to draw their own conclusions. Stepping back, I’m still bullish on stocks and think this was just another head fake by the large institutions to influence prices (so they can buy at better prices).
Jim: Interesting! So, based on what you see now, do you see this as a countertrend correction in an ongoing uptrend, or something more ominous bearing in mind a lot of technical damage has been done now by this recent dip?
Adam: All my proprietary software and indicators tell me that this bull market is still alive and well and this is just another normal (and healthy) pullback within a broader uptrend.
It is very easy for people to get scared on Wall Street. And that is the exact reason why most people lose money, because they make emotional, not rational decisions. Lets put this pullback in the proper perspective. Stepping back, the S&P 500 soared 30% last year and is only down 3% since its record high set a few weeks ago. That is normal and healthy, remember markets take the stairs up and the elevator down.
Meaning they do not just go straight up. They tend to go up, consolidate for a while, then move higher, again and again. Interestingly, support (floor) for the S&P 500 is at 1767-1772 and resistance is at 1812 (ceiling) and then 1850. Yesterday’s low was 1770.45, which is not a coincidence. Until support is breached, the bulls deserve the benefit of the doubt.
Jim: And with the Fed’s punchbowl of printed money and bond purchases evidently slowly being withdrawn, will the bond and stock markets stand up on their own two feet now? Have the fundamentals really changed enough for that?
Adam: Not yet- remember the primary catalyst for this entire 4.75 yr bull market in stocks has been easy money from global central banks. As of right now, even with the last two taper announcements, the Fed is still printing $65B/month to stimulate Main St & Wall St.
Keep in mind, in September 2012, when QE 3 was first announced, the Fed said they will print $40B/month, then shortly thereafter they said they will print another $45B/month. This brought the total to $85/month which lasted for all of 2013. So right now at $65B/month that is still larger than when QE 3 was first announced.
Jim: OK so QE (money printing to buy your own debt) very much alive and well, and the bull market intact for now, albeit after a healthy correction?
Adam: Yes. Remember, other central banks are also printing tons of money to stimulate global markets, not just the US.
Jim: Adam, thanks very much.
Adam: As always, my pleasure.