The Current Situation
We’ll start with the master chart of the S&P 500 (SPX), as it marks out the risk we are concerned with perfectly. Then, we will set you up with a strong protective play.
Price: We are not ready to give up on 2014’s bull market – yet. For now, we’re just concerned that at 6.5%, the current micro-cycle is getting a bit long in the tooth. And you have to respect the fact that price is approaching the all-time high for the sixth time in eight weeks without a breakthrough. Short-term sell.
Volume: This is not subtle stuff here. Any analyst with a dime-store ruler and a thick black crayon can see the trouble brewing. And indeed, we are seeing traders back away from the market until they know how this fight will play out. Short-term sell.
Moving Average Convergence/Divergence (MACD): We are seeing the same trepidation here. The fast average’s “Buyer’s Bowl” has flattened out as traders get cautious. Short-term sell.
Accumulation/Distribution (A/D): This is the only place that we don’t see a short-term sell signal. But A/D is the slowest of our four signals to react to fresh info, and it’s still biased by the last few days’ strong uptick. Cautious buy.
Summary: We haven’t seen a real new high yet in 2014. A breakthrough here would certainly be bullish, and if it happens we’ll be the first to break out the champagne. But frankly, after six failed attempts we have to insist on seeing that move before we can buy into it. That means we want to have a well-balanced portfolio of long and short plays – and that means adding a put on Monday.
The Telling Details
This week, we saw the notes from Janet Yellen’s first FOMC meeting as Fed Chair, and it seems like we are backsliding to the strange days of Alan Greenspan’s complex and opaque “if/then” statements.
Apparently, the Governors are convinced that the economy is doing quite well, and they’re bound and determined to reduce the rate they purchase Treasury bonds. Unless it’s not doing that well after all, at which point they would certainly “taper the taper.” And they have not been willing to nail down their parameters for any of this.
Janet Yellen
Here’s a particularly mushy example directly from the FOMC notes…
Some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee’s policy decisions.
On the one hand, the governors could just be trying to carve out a little elbow room early in the new Chair’s term. But on the other hand, this market has been utterly dependent on the Fed’s monies since we crawled off the bottom after the banking crash.
Barron’s Randall Forsyth summed up everyone’s fears when he noted that:
Since 2009, U.S. stocks have moved in lock-step with the size of the Fed’s balance sheet.
Brass tacks? Wall Street doesn’t like uncertainty, and may try to force the new Fed Chair to clarify her position with another sharp downside move similar to the dips we saw in January.
AI
