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Stock Market Reaction, Fed Minutes And QE3......

Stock-Markets / Stock Markets 2012 Aug 23, 2012 - 03:02 AM GMT

By: Jack_Steiman

Stock-Markets

So the market tried very hard to follow through to the down side after yesterday's reversal, and was doing so successfully, until those Fed minutes were read at roughly 3:00 PM Eastern Time. That was the end of the deeper selling as those minutes pretty much said QE3 was a done deal and would happen almost assuredly sometime in the not too distant future. We all know by now that the market loves free money. Who doesn't, I guess. Although the market didn't explode due to overbought conditions, it did come well off the lows with the Nasdaq leading the way up and performing the best of all the indexes. Froth leading, which is a necessity. The dollar fell and gold rose.



All normal reactions to free cash based on the fear of a massive, global recession/depression. Depression if you're in parts of the Eurozone. No one wants that happening now, especially in an election year. I hate to be so honest about that, and thus, protection is available. With the market surrounded by those who will help in both the Eurozone, and here at home, it's going to be hard to take the good vibes out of the market place. Folks continuing to buy the dips is the way it's going for now. Buying the dips in the leading heavier weighted stocks as well which is really helping to keep things moving along without too much in terms of selling. Stocks such as Apple Inc. (AAPL) and Google Inc. (GOOG) leading the way higher.

Summing up the day, it was a decent one for the bulls as the Dow was once down near 90 points. Nothing negative technically is how things are for now. Always watching for a change in that, but for now, things are more bullish for sure. Always pullbacks.

We turn our eye towards sentiment. The bull-bear spread has been working its way back up with the market trending higher. That's to be expected, of course. The higher we trend, the more folks feel good about things. We are at a spread of 22.6% more bulls than bears. That's neutral. Nothing bearish at all in terms of complacency. However, we're no longer in the territory of just above 10%, thus, the bulls no longer have sentiment as its friend. It's not the enemy ,but not it's the friend either. Completely and totally neutral. The red flag goes up at a spread of 30%, and you basically get ready to sell all your holdings when it reaches 35%. It can get to the 40% range, or slightly higher, but once you're at 35% you need to start taking precautions on your long side holdings. For now, the bull-bear spread is neutral, but the higher we grind up in this market the closer we'll be getting towards that first red flag level of 30%. Something to watch for down the road.

Notice how the Fed is working the global markets without ever doing anything at all. He keeps alluding to the fact that another QE program will be taking place at some time in the not too distant future. He hasn't actually done anything, and I'm not convinced he will right away, because he's trying to scare folks into the stock market. He'd much rather not create runaway inflation. That's just what another QE program would likely do to some degree. We don't know how badly, but clearly we'd be paying more for goods.

He doesn't want to force that down our throats, so his hope is to create enough fear of his actions that he doesn't have to take any at all. That would be the perfect world for Mr. Bernanke. His manipulation through all of these global problems has been masterful. Playing the big fear game or bluff game if you will has really kept the bears away, and allowed the bulls to get more aggressive. It's no accident that his Fed minutes contained this threat ,once again, today ,and thus, the reason for the move off the low. He just wants to keep buying time to try and allow for some form of a cure for what is ailing this country, and all of the Eurozone and beyond. He's playing his hand perfectly for now.

A little deeper selling would be nice to allow the oscillators to unwind further on those daily index charts, which are flashing neutral to near overbought depending on where you look. The Dow is only in the upper 50's, while the Nasdaq is near overbought in the upper 60's. Again, that's mostly Apple and Google. We may just stay more overbought, but it would be better if things unwound further. You can see that this work can be done without too much price erosion. I hope that's how it plays out over the short-term. For now, the S&P 500 has support from 1390 to 1400, with the breakout forcefully above 1425/1430.

Have a great weekend!

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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