With the announcement today from the Federal Reserve to purchase agency mortgage-backed securities and continue their current low interest rate policies (ZIRP) the S&P 500 Index gained over 1.6%. This move pushed the SPX through the major resistance level of 1440. This was a level where we saw a lot of tweets aggressively shorting. In fact, 1440 has been mentioned so much over the last couple of weeks that we believe we’ll see a sizable short covering rally in the next few days or early next week. If you were caught short today it’s important to remember that your beliefs aren’t as important as the market’s reaction. What you want isn’t important. What the market wants is. Blair Jensen Nothing is more frustrating than building a market thesis, checking it against history and current market internals, placing your trade only to see it stopped out within a few days. One thing I’ve learned from painful experience is that I can’t bend the market to my will. So
It’s always a little disconcerting when the Russell 2000 doesn’t confirm an up move in the S&P 500. It tells us that risk isn’t really back on yet and that this might just be a correction of the move down from the early April high. Looking at the chart you could see RUT stalling in March and now it appears to be stalling again. We’d like to see the Russell break back above 818 on the next move up. Over the next few weeks we want to see it hold the 50 and 200 day moving averages. A break below could give us early clues that the move down from April is under way again. If it breaks the next stop for the S&P 500 is probably 1200. But hey, if we get to 1200 SPX the good news will be more QE.
The S&P 500 closed virtually unchanged today (7/30/20120), however, our Twitter Sentiment Indicator for the S&P 500 index fell sharply. The last time this happened was on 7/5/2012. The next morning the June jobs report was released which caused the market to fall for the next several days. What will tomorrow bring? Just an update on 7/31. The sentiment indicator is even lower this morning at -.33 which is where it was at the first of June when the market was making new lows and after a few weeks of intense selling. Meanwhile the market is waiting for tomorrow’s Fed statement. Is sentiment anticipating a lack of a QE3 announcement at 2:15?
There is a lot of talk (actually hopes and dreams) of QE3 coming soon due to the signs of a weakening economy. I’m of the opinion that the economy isn’t what the fed is trying to help. The fed (and the European Central Bank) is trying to keep financial institutions solvent and sure up confidence in financial markets. Their actions over the past 3 years have not been targeting the economy and won’t be over the next few years. The economy is simply their justification for action. What the fed fears most is a loss of confidence that results in falling markets that destroy the balance sheets of financial institutions and even governments (can you say Greece, Italy, and Spain). While they’re standing back and watching the ECB and EU participants try to save European banks and countries, they are also implementing policies that make it easy for banks in the US to recapitalize through high earnings (ZIRP). They’re not implementing policies that help consumers…that would then strengthening the economy.