Always leave yourself an out. I should know that by now. Instead, I offer a mea culpa (Art Cashin, a former altar boy knows what that means - "through my fault." Latin, guys. I took four years of it.) I stated forcefully there would be no QE3. The minutes of the last Federal Reserve Board meeting said. "Screw what Farrell says, we will have a QE 3 if we want one." And, they further said, we will want one if the economy looks like it is struggling. OK, my bad. Now for further fearless analysis, I call on the Fonz.
You remember the Fonz. He was the toughest kid in the high school on "Happy Days" with Ron Howard in his post Opie, pre-mega director days. The show ran for 10 years from 1974-1984. One episode the Fonz explained his mystique to Richie. See, said Fonzerelli, you have never seen me in a fight. I just say I'm the toughest, and act like I'm the toughest, and, therefore, I become the toughest. Thus the earliest incarnation of what became know as the Paulson School of Bazooka Bluffing. Hammering Hank said I have a bazooka checkbook to blow all of you out of the water with, but his bluff was called. Super Mario Draghi tried the same thing with the EU saying the ECB will conquer all if needs be.
I don't think Ben is channeling the Fonz saying a third round of QE will be forthcoming and the economy will be boosted. He knows all the Q'ing we've done has not moved the economic needle. And that could be for a lot of reasons besides the "Q's" being ineffective "q's." Other issues are Congress's inability to act responsibly, banks unwillingness to lend, companies reluctance to borrow etc.etc. The quantitative easing programs have raised asset prices as excess liquidity, when not used in the productive side of the economy, finds its way into financial assets or commodities.
Dr. Ed Yardeni, a genuinely gifted economic seer, dug out an op-ed piece Gentle Ben wrote for the Washington Post in November, 2010. Ben said "... higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." I guess if you think about it, Ben was saying I'll pump liquidity into the economy to keep the stock market up. Well, the S&P is up 12% for the year so no Fed action is needed right now. But if the unemployment rate rises, or the stock market falls, Ben will drop dollars from the sky.
The problem is someday all that excess liquidity has to be drained. We will always then have that little future inflation fear in the back of our minds. But for now, accepting the blunt statement from the Fed, I would suppose any further QE is already priced into the market. Ant delay or disappointment would cause a trading move down. But probably no more than a trading move as Ben appears ready to step in.
So I might be right for the wrong reason, but I'll stay with the thought the market has seen its near term high and we have risk to the 200 day moving average around 1325 or so.
It was one of Simon and Garfunkel's best albums; "Wednesday Morning, 3 AM". The best song on the album was "The Boxer". Maybe one of the best songs ever.
"I am just a poor boy
Though my stories seldom told
I have squandered my resistance
For a pocket full of mumbles such are promises
All lies and jest
Still a man hears what he wants to hear
And disregards the rest."
"Still a man hears what he want to hear, and disregards the rest". Boy, is that ever true in the stock market. Denial, denial, denial is prevalent. In politics as well. But for now we'll look not at Wednesday Morning, 3 AM, but Wednesday Afternoon, 2. PM. That's when the latest Fed minutes will be released, and it will be the beginning of the hot air being let out of the hoped for QE 3 balloon. There will not be a QE 3.
The yield on the 10 year US government bond has risen in the blink of an eye from 1.4% to 1.8%. That is not indicative of a sliding economy. It might not be anything to write home about, but it is not a precursor to QE 3. Other economic signals are mixed, but by no means weak enough to encourage the Fed to act.
With the political conventions about to start we will not get a QE 3 signal at next weeks Jackson Hole meeting where our favorite Uncle Ben will speak either. Fed Chairs avoid being politicized.
To the extent the market is waiting for Godot to deliver a round of stimulus, there will be a general air of disappointment. I read in the Wall Street Journal that over 60% of the players think there will be another round of quantitative easing. No easing and the chance of a little sell off will be at hand. That's my guess. The market will downtick soon. My worst case is the market will visit the 200 day moving average now at 1331, but rising.
Now - fair warning - generally if you had followed my short term market prognostications, your trading experience would have been very short and truly ugly. I wouldn't listen to me and I advise you not to. But I just can't help myself. One of these days I might be right !
For what it is worth, my favorite conceptual play is still the dividend 'trade'. And my favorite sectors are large cap pharma, and large cap tech. Financials are a bit ahead of themselves with 90% of the names trading above their 50 day moving average.