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.
Our Survey Says...
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.
Investment Implications
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.
