November 30th, 2011

Impact of Coordinated Central Bank Action

“These are the times that truly try investors’ confidence.”  Just when you thought the market was going to perform in a relatively predictable way, out from somewhere in left field jump the Fed, 5 European and the Chinese central bankers promising what appears to be a coordinated “global Q(uantitative)E(asing)?”.  Quoting from the CNBC newswire,

“The world’s major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.”

Yes, the market’s initial reaction was a greater than 2.5-3.0% jump in market futures but, as some more level-headed analysts see it, is this not also a sign of the bankers’ frustration and desperation at the inflexibility and inability of legislators to act to cut spending and deficits.  Bottom line, things actually may be worse than we thought.  Remember the market’s reaction when the Fed launched QE I and QE II.  It skyrocketed 30% over the succeeding 8 months but we’re still laboring under 9+% unemployment and the market failed to sustain the gain and is still stuck in a trading range with yesterday’s close 13.94% higher than it was prior the QE I and actually below the level prior to QE II.

Let’s take a look at the chart as of last nights close:

S&P 500: 11/29/2011

If professionals can’t see what lies in the future and complain about not knowing whether to buy long or sell short, then clearly individual investors like you and me are having a very difficult time of it.  There’s only two ways to go: 1) stay long, collect your dividends, weather the storm and hope for the best, or 2) insulate your money as best as you can by either moving into cash or being portfolio protection in the way of hedges like index put options of leveraged short ETFs.

In other case,  the best to close your eyes and ears from the daily news (some call it noise) and stay focused on the long-term.  I’m looking at the trendline around 1220-1225 which has acted as an impenetrable resistance level several times.  The second event I’m watching is the the 200-dma inevitably crossing below the 300-dma, something that can’t be prevented without the market moving above 1260-1275 for several weeks.  The Market Momentum Indicator with which my subscribers are very familiar is based on 4 moving averages plus the position of the Index itself relative to those four.  As I outlined in my report to subscribers this past weekend,

Without some sort of dramatically positive surprise, the moving averages will move into a precise bearish alignment (arranged from slowest to fastest). May 29, 2009 was the last time we saw a perfect bear market alignment as the market was exiting from the Financial Crisis Crash. That period of perfect bear market alignment began just over four years ago on November 7, 2007 as the market was entering the start of the Financial Crisis Crash.

Was today’s announcement that “dramatically positive surprise” or is the market about to enter a period similar to November 2007?  No one knows with confidence so, for right now, rightly or wrongly I’m not willing to gamble and am basically watching from the sidelines.

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