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To the surprise of investors who were becoming used to the markets steady grind higher, last week brought the first real selling of the year. On Wednesday and Thursday, the S&P dropped 29 points (1.9%) on NYSE Composite volume about 20% higher than the year’s average. 28% of the S&P’s YTD gain which took 33 trading days to build was wiped out in two. Behind the indexes, many of the leading stocks such as Bank of America (BAC, -6.3%), Goldman Sachs (GS, -4.9%) and the S&P Homebuilders (XHB, -4.9%) got hit much harder. As they say: stocks take the stairs up and the elevator down.
It is fitting that the primary catalyst for the decline was the release of the Fed Minutes from the previous FOMC meeting. Since the flood of liquidity is generally acknowledged to be one of the primary drivers of the bull market, any whiff that the Fed is even thinking about taking away the punch bowl is a source of concern. Consider that the upcoming $85 billion sequester is equal to what the Fed injects into financial markets every month. Combined with the significantly overbought technical condition of the market, it set off a rapid unwinding.
The most comical aspect of the week was the appearance of St. Louis Fed President and FOMC voting member James Bullard on CNBC’s Squawk Box Friday morning. Bullard made his purpose for being there completely transparent saying that: “Fed policy is very easy and it’s going to stay easy for a long time.” In other words, he was there to reassure the market. Anybody who thinks that the Fed doesn’t pay close attention to financial markets should be disabused of that notion by Bullard’s appearance.
Because the market is a reflection of the mass psychology of its participants according to their weight and activity, the action of the market itself is of preeminent importance. Hence that illusive Wall Street cliche to listen to the message of the market. Despite a decent bounce on Friday, last week’s action suggests to me there is a good chance things have changed and the market’s slow grind higher may be coming to an end. T3 Live’s master swing trader Scott Redler called Wednesday’s action a “key inflection point”. While we can never know with certainty what the market will do, everybody will now be paying increasingly close attention in the days ahead.
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA