The party goes on!
The Fed still has not raised rates, and most people do not see that coming anytime soon. As time has gone on, the Fed has taken on more roles other than what they were first created for. Next came job growth, and today the question was asked if they had a set price target for the market. A wonderful, nice, loaded question which I am sure most investors believe. With CPI, unemployment (even though it's a somewhat fake number), housing and market prices getting higher, why have they not raised rates yet? Simple, the Fed now has taken on the responsibility of maintaining the market in a constant growth cycle, or the illusion of one. You can all thank Greenspan for this one.
Just like the Greenspan and Bernanke put, the Yellen put now has the market wrapped all around its finger. The bad part of this is the bus may have left the station to raise rates without crashing the market. Yellen is trying to pull off a soft landing, but is failing to actually try to land. Yes it will hurt, and the S&P 500 (NYSEARCA:SPY), Dow Jones Industrial (NYSEARCA:DIA) and Nasdaq (NASDAQ:QQQ) markets will all take a nice %30 hit to bring it to fair value, but that is life! That is part of this entire game we play! Some people do not remember when Volker took over the Fed. I personally was not even alive at that time, but man that guy had some guts. He knew it was going to hurt at first, but it is what the economy needed to avoid a meltdown. Maybe the Fed should phone a friend on this one.
I liken the Fed to the bartender at your favorite watering hole. You show up sober and looking to party (make money). You know this person is the one to get it started, so you begin to drink their alcoholic masterpieces (rate decreases, QE). Their job is to make sure you are enjoying yourself, but not too much. Once you are feeling nice and unstoppable, they cut you off and tell you to drink some water (raise rates). This sobers you up and makes the party less fun, then the cycle repeats again. Eventually bars close and will yell out for last call. When this happens the bar closes, the fun ends and sets up for its next run. Think of what happened after Volker strangled out the inflation run in the 80's. It hurt at first, but the party was great for two more decades after the fact! Bottom line is, it's been past last call for two hours and the bartender is keeping the party alive and strong, pouring tequila down people's throats. Nothing good happens after this time of the night, and the same holds true for markets in this situation.
My views on the market still hold true to where they were in last week's articles. Fundamentally and technically, the market is still weak. The Fed has lost all credibility and almost seems confused on what exactly is going on in the market and economy. My price target for the S&P 500 still stands at 1800. At this price it should bring it to fair value based on a EPS metric. The Brexit vote most likely will bounce the markets higher, but it will be a temporary high. My word of advice is be cautious more than ever. I think the picture will be painted a little better in July once we get more earnings reports out and the Fed tells us if they are raising. Something to possibly keep in mind is to go long the VIX (NYSEARCA:VXX). I will be watching that as a possible move.
The Fed has kept the party alive. This fake bull market has been drunk, and it is now time to go home. Nothing too good, or too bad, lasts too long. We will see in the coming months if the Fed can pull off a soft landing. Traders however, will do well in this environment if they play accordingly. As long as the Fed keeps this questionable environment moving, I see the dark clouds only getting larger. Be prepared to experience slow or no growth for the rest of 2016. Best case scenario is the market stays flat, worst case prepare for a %30 correction. I hope the most important metric of the market, earnings, will improve in 2017. Until then, buckle in because it's going to be a wild ride. Time to tighten up stop losses, move to cash and defensive positions and wait for a new buying opportunity months down the road.
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Disclosure: I am/we are short SPY THROUGH BEAR CALL SPREADS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.