Bernake Put and the House of Glass

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

Commentary for 9/5/12

The SPX was -0.3% last week and finished +2.0% on the month. There was a significant drop-off in both volume and volatility for August and the pundits argue that it is because of the Knight Capital debacle.

However, it is more than that as the so called active mutual fund managers are just a herd of index followers in this market and are content with betting on the Bernanke Put to keep the market advancing, but that game is on thin ice.

Emotion rules as the headline risk is high. It is essentially a manipulated market, and it will get more political going into the election, especially with the economic numbers. It is a good bet that Bernanke is almost assuredly out on his ass and back to Princeton if Obama fails to get another term, and also maintain control of the Senate. If that does not happen then you should have a significantly reduced equity allocation in 2013.

The bottom line is that Bernanke`s jawboning QE tactics keeps a finger in the dyke and prolongs the Put ponzi scheme short term, but the fiscal and financial reality will not let that continue much longer, especially if capital starts to flee the bond market bubble, just like the current bank deposit outflows in Spain, Italy, Greece, etc.

We have had QE1, QE2, plus Operation Twist which you can say is a QE3, and the Fed has made bond purchases in the trillions of dollars. However, the results are negative in that the economy is getting worse, unemployment remains high, as does the rate of foreclosures etc., and unfortunately for Bernanke, the US fiscal policy is a disaster thanks to the politicians.

The current market advance saw the SPX make a new intraday cycle high since the 3/6/09 bear market low, but not a new high close. However the INDU, NYA, and IWM all failed to make new cycle highs, and the TRAN is trading below its 200DEMA.

The risk reward of being anywhere close to fully weighed with your long term holdings is negative going into the election, and it will be no surprise if the late March or early April index cycle highs are not taken out. The path of least resistance is down for a potential 5-10% decline at least into October before there is any intermediate O/S condition for any potential short term major index position trade. There is nothing technical or fundamental that I like about this market right now.

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