Don't Fight The Fed

Includes: DIA, SPY
by: Kevin Wilbur

In a concerted effort last week, the U.S. Federal Reserve Bank and the European Central Bank made particularly strong public comments to halt and reverse a global stock market downtrend in aggregate prices. Many analysts believe the central banks must now back up their market supporting comments with actions before the market can genuinely consolidate its gains and continue rally to higher price levels. The ECB meets on Thursday of this week, and global stock markets eagerly await its action.

I believe the Fed is utilizing and emphasizing "the wealth effect" in its overall attempt to print, disperse, and distribute anti-deflationary value across the economy, for deflationary mitigating effects -- and, more hopefully, for aggregate price level stimulating effects.

In the administration of these goals globally, the Fed and the ECB could not have picked a better week than last week for their public and market price affecting and reversing comments. Before they stepped in with their comments, stock market prices had declined to recent key support levels, and further downward momentum seemed at hand.

The central banks stepped in and attempted to maintain stock market prices from falling off key and critical support levels, which the central banks hope to succeed in maintaining and "bridge" the market through (at or above) the end of this important election year. Maintaining certain stock market price support level "bridge heights" is very important to the Fed and the ECB.

Some analysts will mistakenly interpret last week's global market reversal and rally possibly as a vote of confidence for the more conservative U.S. election candidate being perceived by markets as the likely and preferred winner of the coming election. Others may see the reversal and rally as a "vote" in favor of the strength and continuity of the incumbent winning.

I submit that the reversal and rally is predominantly an apolitical central bank stimulated phenomena, in the central banks' efforts (in the absence of effective fiscal stimuli) to keep the global economy from falling again into recession and deflation. Additionally, key and current supporting vector price level "bridges" to get us through this important election year have already been built by the Fed and are in place and in force.

These bridges, which include consideration of both the economic calendar and the political economic calendar and their cycles, include the active Congressional Price Support Vector Bridge (two-year cycle, CCEV) the Active Annual Price Support Vector Bridge (one-year cycle, AEV), the Bi-Annual Price Support Vector Bridge (two-quarter cycle, Q2EV), and the Quarterly Price Support Vector Bridge (quarterly cycle, QEV). (For examples of these and additional political economic cycles, see my article titled "Chart: The S&P And 'Should I Still Stay Away If I Sold In May?'" and my current Seeking Alpha instablog posts on SPY and DIA.)

The Fed monitors the monthly price support vectors, which are also of particular significance to the active trader. Also significant to the active trader is the active weekly price support vector, the daily price support vector, and the morning block and afternoon block price support vectors (which are often impacted and sometimes even formed by the Asian market's and the European market's open, trading high, trading low, and closing price).

How the market carries various heavily weighted weeks and time periods across these support price bridges at key times in the calendar, and how these bridges hold up under these price down-pressure loads is of fundamental interest to the central banks and their management of wealth effect, and when they make "extra-regular" announcements and statements. So, as happened this past week, the Fed and the ECB released announcements to act as price height level supports and cables to prop up prices, holding them up as we bridge this important election year.

Both the Fed and the ECB know they face a very significant oncoming period of market price down-pressure again this September and October of this year. (See the S&P 500 five-year weekly OHLC chart below, which illustrates this.)

In using the wealth-effect stimulus as part of its "printing press" activities to keep the market afloat, the Fed would like to stay in "talk it up" mode if it can, if talk works (cables) well enough in and of itself. So would the ECB. Talk is less expensive than actions. The Fed would prefer to continue trying to stimulate Congress to get into the "stimulating ring" with it, with fiscal stimulus as well. "Acting" also runs contrary to the Fed's usual relative quietness and impartiality and inaction leading into presidential elections, a position the Fed tried to (unsuccessfully) set up last year and earlier this year. "Quiet," however, is now long gone. And the markets now seem on the precipice of expected ECB and Fed action.

Below are charts of the SPX highlighting all the key price support vector bridges that converged last week. The active PCEV (Presidential Cycle Echovector bridge) is highlighted in white. The CCEV (Congressional Cycle Echovector bridge) is in yellow. The AEV (Annual Cycle Echovector bridge) is in red. The Q2 EV (Bi-Quarterly Cycle Echovector bridge) is in grey. And the QEV (Quarterly Cycle Echovector bridge) is in peach.

Click to enlarge images.

S&P 500, SPX Five-Year Daily OHLC

S&P 500, SPX 30-Month Weekly OHLC

So this week, in this important election year, many analysts are firmly confronted with the selection between two powerful and competing Wall Street maxims: "Sell In May And Go Away" (and staying away), or "Don't Fight The Fed." Analysts are wrestling this week as to which of these two maxims should rule the day, and which of these two maxims should rule these next two weeks and next two months in the stock market. And they are also wrestling with how to approach positioning in the market, if they elect to do so. Staying nimble also seems to be another rule of the day.

In this market environment, we suggest the employment of active and adjustable echovector bridge-based straddling positions to manage stock market exposure to changes in the general price levels. Setting straddles at these bridge levels on their relevant time basis is an effective and opportune measure and advanced trade strategy. Such an approach is particularly well-tailored to and could prove very valuable in engaging and effectively managing these market situations going forward into the presidential elections this fall and thereafter, regardless of what the Fed may or may not say or do in the meantime.

One way to employ such a straddle would be to utilize the SPY ETF and/or the DIA ETF. By setting up an advanced trade technology (see "On-Off-Through Vector Target Price Switch") at, for example, $136 on the SPY or at $128.5 on the DIA, with appropriate dynamic triggers and stops included, such a straddle can be employed.

To perform the short side of the straddle, set a short trigger below either of these mentioned target price switch levels (e.g., $136 on the SPY and/or $128.5 on the DIA) pre-programmed as a "repeating short trigger switch" at the trigger level on reverse downtick action through the trigger price, with stops set to activate on reverse uptick up-through action. To perform the long side of the straddle, set a long trigger above either of these the target price switch levels ($136 on the SPY and/or $128.5 on the DIA) pre-programmed as a "repeating long trigger switch" at the trigger level on reverse uptick action through the trigger, with stops set to activate on reverse downtick down-through action.

Now may be a very good time to employ this general market straddle and this more advanced trade technology and active position management methodology, especially when reviewing the chart of the S&P 500 over the past four years within the current presidential cycle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.