Don't Fear The Taper

Good Morning. Stocks have been see-sawing back and forth a fair amount lately and realistically, the short-term trend can't be rated any better than moderately negative right now. And after a strong rally that marched relentlessly higher for six straight months, I think we can all agree that the recent sloppy action is to be expected. Thus, the question of the day, of course, is if the current consolidation phase will lead to something akin to a "June swoon" or a resumption of the uptrend.

My technical analysis textbook suggests that unless the bears find a reason to be - and soon - the joyride to the upside is likely to continue at some point. If memory serves, the book says that a market tends to exit a consolidation pattern heading in the same direction it was when the consolidation began. So in this case, the direction in question would be higher. Put another way, a trend in motion tends to stay in motion.

It probably won't surprise you to learn that the bear camp doesn't agree with this prognosis. No, our furry friends suggest that the Fed will soon start to taper their bond buying program and the resulting rise in interest rates will put an end to the rally in stocks that has been driven by the Fed stimulus. The bear camp also points to the weak ISM data (but conveniently ignores the 16 prior economic reports that had come in above expectations), the worsening economic conditions in Europe, the slack growth in China, the big gamble being made by Japan, and the unrest in Turkey as reasons to expect things to turn downright ugly soon.

My take is that traders are playing a waiting game right now and as a result, the action has gotten a little messy. The thinking seems to be that the May jobs report could play a key role in what comes next. You see, the key issue of the day is the question of when and by how much the Fed will taper their stimulative efforts. And since Mr. Bernanke has made it clear that the Fed is targeting the jobs market as the Fed's endgame, the debate surrounding the taper seems to hinge on whether the May employment report will be better or worse than expected.

In fact, there was a fair amount of chatter on Tuesday that the Fed's first move could take place at the September FOMC meeting. So, the situation appears (key word) to be this: Should the jobs report come in strong, traders will assume that the QE punch bowl will begin being pulled in a few short months. But if the report is weak, well, then Bernanke is likely to maintain his dovish stance and continue to put some "insurance" QE into the economy.

My apologies if I'm simply restating the obvious this morning or worse yet oversimplifying the matters at hand. However, I'm a big believer in identifying and understanding the driving factors in the stock market on a daily basis. And the bottom line is the expectations of what the Fed is going to do and when are the important driving forces right now.

Personally, I don't think we should be overly fearful of "the taper." Bernanke's bunch isn't talking about stopping their QE program at this stage. Remember, "the taper" is simply a reduction in the amount of stimulus being provided. And let's also remember that the Fed most definitely isn't talking about exiting their stimulus programs (i.e. selling the $3 trillion in bonds they've amassed over the last 5 years) any time soon.

The point is that the Fed Chairman has pledged to keep their stimulus programs in line with the state of the economy. In other words, if the economy improves, the Fed will provide less stimulus and vice versa. And if you can step away from the trading turret for just a moment and take a look at this with an open mind, you will likely agree that this makes a lot of sense. So, while it may sound scary to some, "the taper" actually sounds like the sensible - and conservative - thing to do for the economy right about now.

Does this mean the algos won't freak out if "the taper" starts to happen sooner rather than later? Uh, no. My guess is there are all kinds of sell programs being put in place to react any such announcement. However, my bet is that cooler heads will eventually prevail as "the taper" beats the heck out of several other possible outcomes. So, if we start to see some serious downside tied to any taper-talk, long-term investors might want to think about doing some buying.

Turning to this morning...

Number 21 wasn't so lucky for the streak of consecutive up Tuesday's as the indices pulled back a bit yesterday. The weakness appears to be continuing this morning as the volatility in Japan continued, pushing all major overseas markets lower. Europe's Services PMIs weren't bad, however the UK, Germany, and France are all seeing more than 1% losses at this stage. Here at home, we've got the ADP data on tap as well as the Services PMI to look out for.

Follow Me on Twitter: @StateDave

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Posted to Daily Decisions Service on Jun 05, 2013 — 8:06 AM
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