Earlier today, I published an article highlighting the downside risks to stocks in the aftermath of the Fed's decision to extend Operation Twist by $276 billion. I noted that the economic data released Thursday was abysmal and pointed out that Spain's auction of 2-, 3- and 5-year notes was a failure in terms of cost despite high bid to covers. Just a short time later, Goldman Sachs released a note to clients supporting the contention that stocks could be headed for a rather steep decline:
We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June.
Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term.
The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers' rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.
This is essentially a reiteration of the idea that the Fed's decision was already priced-into stocks before Wednesday.
What is interesting is that Goldman's chief U.S. economist Jan Hatzius who just days ago opined that the Fed would opt for outright asset purchases instead of the extension of Operation Twist, seems to have backed-off the idea that more Fed balance sheet expansion is in the cards. Hatzius today said investors should fear a so-called "monetary cliff," wherein the Fed seems poised to scale-back its efforts to combat the deceleration of the recovery with monetary policy:
the central bank's failure to explicitly extend its low-rate guidance - sets the country up for a drop-off in accommodative Fed policies, points out the firm's chief U.S. economist, Jan Hatzius."The economy now faces a 'monetary cliff' in addition to the 'fiscal cliff,' " wrote Hatzius, in a note to clients.
Far from sticking with his earlier contention that monthly purchases of assets to the tune of $50-$75 billion could be just around the corner, Hatzius now believes the Fed's failure to state its intention to keep rates low past 2014, and the expiration of the new Operation Twist at the end of this year could mean the "Bernanke put" is close to expiring. Goldman's comments today reinforce my contention that now is the time to get short the S&P 500 (SPY) and get long volatility.