The week started with hope that the Federal Reserve would come to the rescue of the markets as the Nasdaq (QQQ) and the S&P 500 (SPY) appear to be running out of steam. Instead, the markets got the bare minimum fix with Operation Twist extended until the end of the year.
The idea that additional long bond purchases would drive economic growth by continuing to push yields lower has been looked at as a pipe dream after the first version of Operation Twist failed.
Bond ETFs like the iShares Barclay's 20+ Year Treasury Bond Fund (TLT) appear to be close to a top but with the Federal Reserve being an elephant in the china closet the bond market can stay irrational longer than people realize.
The real problem with Federal Reserve manipulation of the bond market is that it cannot be used as a guide for determining economic turning points. In the past traders looked for signs like an inverted yield curve to signal a forthcoming recession. With rates at zero and Treasury yields being manipulated there is no way to glean information from the yield curve today, leaving traders befuddled.
Of course, this does set up for one of the greatest shorting opportunities in the world when the Federal Reserve does decide to exit their bond purchases once and for all as rates will finally be left to actually find price and yield discovery.
Meanwhile, economic data released confirmed the slowdown in the markets with the Eurozone Flash PMI for June coming in at 44.8 after a final May print of 46. The Chinese HSBC Flash PMI printed an initial number of 48.1 while the US June Flash PMI came in at 52.9.
Across the board manufacturing continues to fall indicating that the economic slowdown has turned into a recession despite the best efforts to mask the word from investors and market participants.
The real problem in the United States is that we are unable to grow the economy at a moderate rate so that the people entering the job market will not be properly absorbed. It is this inability to foster job creation that has fomented the OWS movement as this generation sees a future where they will not have a better life than their parents.
Until the market decides that a recession is a good thing so that we can then move forward and begin looking for signs of a potential recovery investors should look to sell or hedge their long positions in anticipation of the next leg down in the markets and preparing for a recession rather than hoping for a recovery.
Disclosure: I am short the broad market using leveraged ETFs.