There was some profit taking this week. Continuing strong monthly economic data is worrying
some players that the Fed may end its ZIRP sooner, and begin a series of hikes to short rates
not long after QE3 ends next month. Bond prices also weakened as a result. Evidence from
recent Fed governors comments on the economy reveal that Ms. Yellen will have to fight harder
to keep the ZIRP in play in support of the labor market. Also, there are no doubt some players
who want to raise a little cash ahead of the snuffing out of QE3 which is down to a pilot light.
The weekly forward looking economic indicators have come in on the flat side since Jul. 25
with a lack of progress in weekly jobless claims and sensitive materials prices looming as
important.These indicators are volatile, but there is enough of a pattern to wonder whether
the stronger monthly data may soften some ahead. The liquidity cycle is still running strong
but is fading from peak yr/yr readings suggesting a period of growth moderation lies ahead
Technical issues surrounding the close - out of QE and the need for the Fed to provide an
extra measure of liquidity around the holidays may preclude action on ending the ZIRP until
after the beginning of the new year. And, if there is evidence of a more moderate tone to the
economy by then, Fed Chair Yellen may have a stronger hand to confront the policy hawks if
The larger issue here still remains: Whether private sector credit generation will continue
vibrant enough to pick up the slack created by the cessation of QE. If such happens, and
private sector lenders have not just been piggybacking the QE program, then Ms. Yellen
will find her back at the wall if she demurs on raising short rates as the economy would
likely be strong enough to warrant further calls to end the ZIRP. Since I regard this
transition in liquidity sourcing to be a major experiment with little empirical backing, I
would suggest keeping enthusiasm tempered.
The sell off this week has turned the short term indicators negative but did not do enough
damage to trend to signal worry yet. The intermediate term overbought alluded to in the
prior post has eased a little. Major trend support is around the 1970 level with crucial
backstop support at the 100 day m/a.
the market has traders' attention now because of the possibility that the recent highs in the
SPX just above 2000 might constitute a possible secondary and bearish top. This is due
diligence only now as there have been several such patterns in the long run up since late 2012.
SPX Daily Chart
- 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 !!!