The more familiar saying is probably "Dance with the one that brought you", but the title of this column as written seems appropriate, especially given the subject matter here.
As a trader, investor, or adviser, if you followed the tried and true formula of "Don't fight the Fed", then you made a lot of money over the last five years in the financial markets. The Fed's quantitative easing programs have been hugely successful at inflating asset prices, especially in the stock market since March 2009.
However, the "dance is over". The Federal Reserve has turned out the lights and left the party! Remarkably, no one seems to have noticed as yet, but this will soon change! And the consequences for equity markets won't be pretty!!
The Fed's monthly bond purchases have been "tapered" steadily over the last 5 months, and rhetoric from most Fed governors and from Chair Yellen herself is that monthly bond purchases will end completely before year end 2014. And Philadelphia Fed President Charles Plosser said last Tuesday that a strengthening U.S. economy may
force the Central Bank to actually hike rates "sooner rather than later" to stay
ahead of inflation. Affirming his hawkish stance, Plosser said that the
Fed is at risk of falling "behind the curve" in its control of potential inflation
if policy remains at its current loose level while the economy continues to grow and the
labor market continues to improve. It's not hard to imagine a scenario where other Federal Reserve hawks like Plosser will soon be given the platform to express similar views.
Bottom Line: The U.S. Federal Reserve is quietly engineering a "normalized" monetary policy where bond purchases will soon end and short-term interest rates will then be allowed to rise from their current level near zero percent. I firmly believe that Wall Street has underestimated the Fed's resolve in its pursuit of this goal. In the interest of full disclosure, I am aggressively short the S&P 500 Index while also hedged with long positions in several precious metals mining stocks (AG, EXK, GG, & GDXJ) in my managed accounts. I think it could be argued that the U.S. Equity Market is the single "most loved" asset class on Earth right now, while Gold/Silver (and related investments) is the single "most hated" asset class.
The latest monthly Margin Debt data from the New York Stock Exchange is interesting and revealing. Margin debt fell for the 2nd straight month in April, another sign that U.S. stock prices could be vulnerable here to a major correction.
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| Russell 2000 Index Daily Chart with 50-day Moving Average Line and 3 Std. Dev. Bollinger Bands |
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| DJIA ETF (DIA) Weekly Chart with Computer-generated Buy & Sell Signals |
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| SPDR Utilities ETF (symbol XLU) Monthly Chart with Computer-generated Buy & Sell Signals |
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| S&P 500 Index Monthly Chart with 50-Month MA & 3 Std. Dev. Bollinger Bands |
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