Friday, 23 September 2011

GUEST POST: The Naked Central Banker

Guest post by Murray Dawes from Money Morning Australia

Well it looks like Bernanke has finally given up.

Operation ‘Twist in the Wind’ couldn’t jump-start a Honda Civic.

Delivering lower long-term interest rates won’t inspire crippled banks to lend or indebted consumers to borrow. The unintended consequences of this new plan are the Fed will increase its risk at the long end of the yield curve while bond prices are at the highest in a generation.

So who’s going to bail out the Fed if bond prices crash?

Oh that’s right, they’ll just print their way out of trouble.

What will printing do? Ultimately it will feed into higher inflation which should make long-term interest rates go up, not down.

But it’s not just what the Fed has said it will do. You can read a huge amount into what the Fed didn’t do.

There are internal splits within the Fed on the issue of money printing.

The market was hoping for some more candy from the Fed but got none. That is big news. The Fed is basically saying it won’t bail out the market right here. That’s bad news for the share market.

The only reason shares have been holding up lately is because of the fear or hope that the Fed might print more money to keep markets afloat.

Without that crutch, the market is faced with an economy that has stalled and a European Union that is cracking wide open. Based on that, why would you buy the stock market?

For all of the talk about how cheap the market is, you have to remember that the cheapness is derived from bottom-up forecasts [Ed note: analysts who look at individual stocks are called bottom-up analysts, analysts who look at the broader economy and then select stocks are called top-down analysts]. And they are looking decidedly optimistic based on where most economic indicators are currently pointing.

And as those forecasts ratchet down the market won’t look so cheap.

On a technical note, we have rarely seen so many charts resting on the precipice as they are now.

There is very little support beneath current levels. And Bernanke revealing himself as the king with no clothes should be enough of a catalyst to cause a stampede out of stocks.

In the latest YouTube free market update we said Bernanke needed to surprise the market to engineer a rally. He didn’t. He moved the deckchairs on the Titanic and shrugged his shoulders!

Look at this chart of the ASX 200:

ASX 200 daily chart

ASX 200 daily chart[Click here to enlarge]

You can see that over two years’ worth of buying is now out of the money.

I assure you most of these buyers have not hit the sell button yet. If we get another bad night tonight in the US then you could feel very confident that the S&P/ASX 200 will revisit the August low of 3765… and perhaps fall lower. [Update: there was a bad night. And the ASX went as low as 3880 and is now at 3906.]

The key level to watch in the US is 1155 on the S+P 500. This is the ‘Point of Control’ of the most recent distribution (we explain this in the latest free market update, click here to watch now).

If the market busts under there, then it’s odds on the S+P 500 will move down to 1100 points [Update: as of writing it is at 1129 and falling] . And if the market falls below that level, what then?

Below there it gets really scary.

Murray Dawes
Slipstream Trader

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1 comment:

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