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QE: The Beginning of the End

Three Months Of Taper Talk

Since Ben Bernanke uttered the word "taper" before the summer kicked-off, the tone in the financial markets has been markedly different. Even though taper has been the hot term on Wall Street for three months, the market's focus remains squarely on the Fed. From Bloomberg:

"They want to get back to a neutral balance-sheet policy but that doesn't mean they want rates to skyrocket here," said McCarthy, a former Richmond Fed economist. "The market is hypersensitive," and the taper represents "the beginning of the end" of unprecedented monetary stimulus.

Heading into Friday's trading session the S&P 500 was up one point this week. With a basically flat market, the technical picture has not changed much. The S&P 500 has possible overhead resistance between 1680 and 1685 (see point A below). Simple support and resistance is also highlighted via the pink triangle near point B. As long as the S&P 500 remains inside the pink triangle, some patience is in order relative to portfolio allocations.

$SPX Chart - Daily Support and Resistance

Our Survey Says...

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Tapering of the Fed's bond buying campaign would be a good thing if the markets felt it was due to an improving economy and labor market. We believe tapering is about bubble management. Regardless of the reason, the market believes tapering is coming and it is coming soon. From Bloomberg:

The policy-setting FOMC probably will reduce the pace of its bond buying next month, according to 65 percent of economists surveyed Aug. 9-13 by Bloomberg. Its first step may be small, cutting monthly purchases by $10 billion to a $75 billion pace, according to the median estimate of 48 economists.

Broadly Comfortable

Chairman Bernanke laid out a possible tapering schedule three months ago, much to the market's chagrin. As noted Wednesday, the Fed minutes this week did little to calm the tapering waters. One passage we did not highlight Wednesday also aligned with the "we are on schedule" theory. From Bloomberg:

Fed officials were "broadly comfortable" with Bernanke's plan to start reducing bond buying later this year if the economy improves yet decided against adding any more information about the outlook for asset purchases in their July policy statement.

Wait and See

Like the picture painted by the daily chart above, the S&P 500 ETF (SPY) has a tentative, but undecided look when viewed from a weekly perspective. SPY sits near the intersection of two forms of potential support (blue and green lines). The charts call for bullish and bearish migration plans since many investors remain in the undecided camp.

SPY Chart - Testing Weekly Trend Support

Investment Implications

Under Water

As shown via the daily S&P 500 chart above, the market has not broken important support, nor has it pushed above recently created overhead resistance. Stocks, for the most part, have been treading water Monday through Thursday. Therefore, the allocation currently recommended by our market model remains prudent from risk-management and migration perspectives. We have raised a significant cash position, which acknowledges the increasing risks. Our long positions in the broad market (SPY) respect the slight edge the bulls still maintain over the bears. Our holdings in small caps (IJR) and technology (QQQ) are still in the outperforming category. If the Fed decides not to taper, we can migrate back to a fully-invested bullish stance. If the market continues to have the taper blues, we can migrate further away from risk. As always, flexibility and an open mind are required for a central bank driven world.


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