The Fed's QE 3 liquidity program has been the major force behind the market's powerful
rise over the past year. The SPX has lost momentum since this spring when Bernanke
first introduced the idea of curtailing the growth of securities purchases within the program.
The market's p/e ratio has powered higher this year, but it is interesting to note that corporate
bond quality yield spreads have not narrowed nearly as one should expect in an ongoing and
solid economic expansion. Naturally, this divergence reflects the far keener interest in equities
over bonds on display through 2013.
Market players have become very mildly defensive ahead of next week's FOMC meeting set
for Dec. 17 - 18. There is increasing brave talk among investors that the economic recovery
is fast becoming self - sustaining and that QE is fast becoming redundant, but short term
price action since this spring when tapering the program was first broached suggests ongoing
very keen interest in what the Fed may have to say next week.
The current leg of this cyclical bull dates back to Aug. - Sep. of 2011. The market has followed
a strong trajectory over this period with the band for the rising SPX set at about 150 basis
points. The market has not kissed the bottom of that band since late 2012, thus allowing a
strong overbought condition to develop. Here is the SPX Weekly Chart. The tops of the
trading band match up reasonably well with the tops in the Keltner channel shown in the chart
and you will note the drawdowns which have happened when the SPX has hit or slightly
exceeded the Keltner channel tops. Interesting that the market is just re-entering the channel
with the FOMC meeting dead ahead.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!