Pullback #1

I have been blogging for while now that a pullback at some point is inevitable and would even be healthy considering the parabolic move most of the key indexes and many stocks have had so far this year. However, there seemingly has not been a meaningful catalyst to trigger a noticeable pullback or better yet a healthy 10% correction, until maybe now? Taper talk is back on the table at the highest level since late May thanks to the continuing flow of recent positive economic data. In fact, some pundits predict that the Federal Reserve will begin reducing its asset purchases as early as this upcoming week. This chatter has been enough for the markets to take notice with the Dow Jones Industrial Average (chart) falling 264 points this week or 1.7%, the Nasdaq (chart) retreated by 1.5%, the S&P 500 (chart) gave back 1.6% and the small-cap Russell 2000 (chart) closed the week lower by 2.2%. Now let’s keep this into perspective, these benchmark indices on the year are still up a whopping 20%, 35.5%, 24.5% and 30% respectively.

What everyone has been accustom to for the past couple of years is that the protractive accommodative policies of the central banks from around the world would keep a floor under the markets, which most certainly has been the case. However, in late May of this year there had been widespread speculation that the Fed would indeed begin to reduce its bond buying and mortgage backed security purchases which sent the markets lower by over 5% by late June. The tapering fear at that point became unfounded as the economic data back then was still coming in too skittish in the Fed’s eyes.

Fast forward to today and there may now be enough positive economic data such as Q3 GDP coming in at 3.6%, the labor market showing signs of strength, personal spending rising and overall business confidence improving. These signs could be enough for the Fed to slowly reduce its asset purchases. So now the question on all minds is “how will stocks react once the Fed begins to taper?” This subject is currently being highly debated in most circles of the financial world and quite frankly no one knows. I suspect that the Fed will start to taper sooner than later but that they would be very conscious and conservative with their approach and how they signal their future actions. That said, once the central bank removes itself from the limelight and allow the markets to trade in a normal environment and on their own merits, I would expect volatility to get back to normal levels, hence, healthy pullbacks and even corrections should be back on the table. With this type of market environment, both long and short traders would be able to compose strategies based off of fundamentals and have the confidence to act accordingly.

Both Paula and I wish everyone a very safe, healthy and happy holiday season 🙂



Stimulus to continue…

Stocks finished the week modestly lower despite the Federal Reserve extending its commitment to keep interest rates near zero. For the week, the Dow Jones Industrial Average (chart) closed lower by 20.12 points, the Nasdaq (chart) -6.71 points, the S&P 500 (chart) -4.49 points and the small-cap Russell 2000 (chart) was one of the sole indexes that managed to eke out a gain finishing the week up 1.48 points.

On Wednesday the central bank enhanced its accommodative policies by now tying the near zero interest rate environment to the unemployment rate vowing that interest rates will not increase until the unemployment rate in our country moves down to 6.5%. I think this creative move surprised most economists for never before has interest rates been directly tied to the unemployment rate. However, the market reaction was less than impressive to latest addition that the Fed made to its policy. My beleif is that until we get some sort of deal out of Washington on the fiscal cliff, not too much will be able to move the needle on these markets. That said, once we have clarity on the fiscal cliff dilemma, I will continue respect the power of the central bank and its ability to remain a significant force in our economy and our markets. In the meantime I will pay close attention to how the market action looks vis-a’vis the technicals on the key indices, and will be ready to deploy a long bias strategy once the coast is clear, Good luck to all.

Have a great weekend 🙂


Stocks soar, the Fed pulls out all the stops!

I know we keep talking about the Federal Reserve, but on Thursday Ben Bernanke announced the mother of all stimulus programs. The new stimulus package includes $4o billion a month to be injected into the economy  and a promise that it won’t stop until the unemployment picture dramatically turns around. Never before has a central bank made such a large extended commitment and then tie it to the jobs market.

On the heels of this announcement, stocks soared with the Dow Jones Industrial Average (chart) finishing the week up 2.15% and is now up year to date 11.26%. The Nasdaq (chart) closed the week up 1.52% and year to date is up a staggering 22.22%. The S&P 500 (chart) on the week marched 1.94% higher and so far this year is up 16.55%,  and last but not least, the Russell 2000 (chart) small-cap index closed up 2.66% and is tracking a year to date gain of 16.71%

Yes I triple confirmed the above statistics and there are no typos. Now the multi-million dollar question is  “is this bull market out of breath?” It’s only natural to think that this tape is overdone and is well overdue due for a healthy 5% or even 10% pullback? This may especially ring true with the most recent middle east tensions, the upcoming third quarter earnings reporting season and of course the U.S. presidential elections all on the horizon. That said, with the Federal Reserves unprecedented commitment to truly do whatever it takes to get this economy and now the unemployment picture completely turned around, I would think that any pullbacks would provide excellent entry points. Whatever you choose to do, make sure to always consult with a professional investment advisor.

Have a great weekend 🙂