Fed Theory and Market Reality Diverge
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 1/19/11
The SPX advanced for the 7th straight week with higher highs and lows, which is a first in this bull cycle, and finished the week +1.7% to 1293.24 It made a new intraday bull cycle high yesterday at 1296.06, so the SPX cycle advance is now +94.3% from the 3/6/09 667 bear market low and is 22 months or 683 calendar days old.
Jan has significant time symmetry as it did at the key highs and lows in 2010. However, the Fed and QE2 upped the ante, and it is a question of how long manipulation trumps reality. It is evident that QE2 is not working the way the Fed and most administration friendly economists thought it would in theory but in reality interest rates are on the rise despite the Fed and QE2.
Last week, Steve Liesman [CNBC] put that question to Bernanke, and said that both interest rates and commodity prices are rising despite QE2, so how can that be a success ? Bernanke`s answer was “We have seen the stock market go up, and the small-cap indexes go up even more” That is another example of Bernanke essentially admitting that the market is a tool and is being manipulated.
The Fed has two politically imposed mandates, which are keeping prices stable, and creating an economic climate for low employment, so I guess manipulating the stock market is now the third one. None of those three mandates was what the original Fed was intended to carry out. The Fed is now owned and essentially mandated too by the Politicians, so what can go wrong ???
Many professionals expect a pullback, although many remain in the closet about it because they work for institutions and money managers that have to keep the game going so they always have to hype the market. Insider selling is the highest in four years, and there are negative momentum divergences, as the major indexes are extremely extended on a 1 year STDV basis. The sell side brokerage firms are hyping 2011 for a significant gain in economic growth, in addition to the bullish scenario for the 3rd year of the Presidential Cycle. However the SPX is already +94.3% going into that cycle so that is a headwind to the 2011 exuberance.
The key price and time symmetry has called each of the significant reversals, both long and short in 2010, and the market is now in a significant Pi time symmetry zone [Jan], so the probability favors a tradable downside reversal, but not a bear market quite yet.
The day trading has been excellent so far for Jan 2011, but most of the best opportunities are in the Trading Service focus list stocks, and commodity ETF`s which are always traded both ways. The 30 day average implied volatility of the SPX is extremely low, which means the daily range of the major indexes is narrow, and day trading needs volatility and intraday travel range. The 30 day AIV for the SPX today is 13.78, while the GDX is 30.04, XME 30.66, OIH 26.25, IWM 22.43, and even the TLT at 16.36 is higher than the SPX.
Have a good trading day!
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