Although the Fed minutes did not provide much in the way of new information, nor did they provide the strong quantitative easing (QE) signal the markets were looking for, media coverage seemed to be slanted toward the easing camp. Below are excerpts from the Wall Street Journal:
Federal Reserve officials sent new signals they are seriously considering more actions to bolster the economic recovery… A few Fed officials were ready to move aggressively when the Fed met in June and several others said they might want to take new measures if the recovery loses momentum or their growth and employment forecasts are cut once again… Dan Greenhaus, chief global strategist of BTIG LLC, described the Fed report as "a clear and unquestioned step" in the direction of taking further action to boost growth.
In terms of market expectations, the odds of more QE have increased significantly. From Reuters:
A Reuters poll of 16 U.S. primary dealers - the large financial institutions that do business directly with the Fed - taken after the June jobs numbers showed that they see a 70 percent chance the central bank will ease policy again.
Why is the market so hung up on QE? QE pumps printed money into the financial system, acting as "juice" for asset prices. While they tend to play it down, one of the objectives of QE is to create asset price inflation. From the Wall Street Journal:
Fed officials believe the central bank's actions are helping to push down long-term interest rates and giving households and businesses more incentive to spend, invest and hire. The Fed also believes the bond-buying programs push investors into other kinds of investments, such as stocks, which also help to drive spending and investment.
As shown in the graph of the S&P 500 (SPY) in 2010 below, stocks took off like a rocket after Ben Bernanke strongly hinted QE3 was on the way in late August 2010.
Shifting back to the present day, all three major indexes held near logical areas of support after the Fed minutes were released. Holding support does not mean stocks will necessarily begin a new march higher, but it is a good sign from a short-term perspective.
Should tech stocks (QQQ) fall further, a cluster of potential support sits near 2,850. The chart below is as of Wednesday's close.
The Dow (DIA) looks a little weaker relative to the NASDAQ and S&P 500, but it still held Wednesday near trendline support.
The chart and concepts below were originally presented on June 13. The chart has been updated as of July 11. The chart tells us the S&P 500 has not lost enough of its recent upside momentum to negate the still-in-progress attempt to form a bottom.
The noisy weekly chart of the S&P 500 below is easy to understand if you look at each piece in isolation. The top portion shows the stock market. The bottom portion shows a momentum indicator, Williams %R (Wm %R). The colored arrows are described in detail below the chart.
- The green arrows show stock market bottoms, or buying opportunities, in 2010 and 2011.
- The red arrows show "it's too early to buy aggressively" signals from Wm %R. In 2010, Wm %R reached -56.86 on a false rally; in 2011 it reached -53.92. That tells us to be careful until Wm %R can close above -53.92 on a weekly basis. The good news for the bulls is the -53.92 hurdle has already been cleared in 2012 (see bottom right).
- The purple arrows show "confirmation" that a bottom is in place. On the subsequent market weakness, Wm %R stayed above -62, which was indicative of slowing downside momentum in stock prices. Significant gains in stock prices followed. With Wm %R closing at -49.72 on July 11, 2012, the recent bout of weakness has not seen momentum dissipate in an overly-concerning manner.
While there is no question the markets have weakened significantly over the past week, the damage still falls within the bounds of a normal counter-trend rally within the context of an ongoing uptrend. As long as that remains the case, we will continue to give the bullish case the benefit of the doubt. Our bearish radar would perk-up considerably if the S&P 500 failed to hold near 1,308, and then 1,280.