TheSlayer's Market Thoughts

SPY June 24 2013

The Bernanke crash continued on June 24, with unabated selling until mid-afternoon, when short-covering and bargain hunting drew buyers. The wild buying at end of day did not feel "organic," but rather that of a technical bounce. SPY hit prices it had not seen since April.

The only thing missing from the market right now is confidence, since the fundamentals are not much different than they were a week or month ago. When mass sentiment takes hold, you get vicious downdrafts like this, but they can dissipate quickly when something reassuring happens as well. Market makers have known this at least as long ago as when Whitney strode confidently across the floor of the exchange with a handful of cash in November 1929. Recent action is nothing like that time, of course, so far this remains simple topping action.

Theoretically, the market should take Fed tapering as a non-issue since it only happens due to a strengthening economy, but that's a fairly naive viewpoint favored by the likes of former Ivy League professors.

The bond market is putting some pressure on the Fed. One of many benefits of QE was to drive down rates, which greatly eased the government's carrying costs for the national debt. As rates skyrocket due to the Fed's careless handling of public confidence, the bond guys are making a statement which is going to affect debt carrying costs and, ultimately, government spending. That's a long-term negative for the economy. But that's far in the future, right now everybody can stick to their guns. The Fed erected a very delicate house of cards which is having some difficulty. Fed Presidents coming out and calling the bond guys names is just, how shall I put this delicately, unseemly.

The Fed's current mania with being "transparent" is completely at odds with the previous 100 years of Fed policy. The old system worked pretty well, skilled professionals working behind the scenes and doing the best they knew how to do. Coming out and saying "We will do X" is all well and good and proper, but coming out and saying "We will do X if Y happens," with Y highly uncertain, is not really telling the market much except that everything is up in the air and that the guys behind the scenes don't have a clue. It creates uncertainty by itself - and the market hates uncertainty, as we have seen the last few days, with the VIX taking off. Sometimes, you need things to just happen when they need to happen based on unassailable facts of the moment based on past actions, without a lot of talk and foreshadowing and public gaming of possibilities in advance, as in a college seminar.

Things are likely to remain volatile for some time, which is not unusual for summers anyway. The congestion area from March provided support today, ultimately the market may settle there for a while. How far down the averages ultimately will drop is anyone's guess, but this only is a 5% correction so far, not much by historical standards. The Nikkei may be telling us something with its recent action. Not worth hazarding any guesses right now, play it day by day. The 1540s are a lot closer now.