Fed Says Goodbye To QE....If......

By: Jack_Steiman

Data dependent. If the economy continues to recover, Ms. Yellen says that she'll continue the tapering until it's at zero. She said that likely in the fall the QE program will be over completely. No more liquidity. No more free lunch. October is the hoped for end to all that free cash. The market's reaction was a big yawn at a time when it had every right to crash lower based on daily and weekly MACD's. Why is it having trouble falling?

Ms. Yellen answered that question this way. Rates will remain low for the foreseeable future no matter how well the economy recovers. Again, forced bull-market language. Where else will you put your cash type of warning from her? You're not running to take 2.7% in ten years, etc. If you want longer-term performance, you go to the stock market until you can get a strong return on rates. That day will surely come but it's not in our immediate future.

Ms. Yellen also said if the economy does not recover she will continue to supply liquidity. So it is a big if. Will the economy recover continuously from here until October? I have no answers, but again, we know rates will remain near zero, thus a bear market is extremely unlikely even with the liquidity being taken away. Yellen is good. She's not afraid to pull out the free lunch, but she's smart as well. Keep those rates low and the market should be fine, and thus, so should the overall economy.

The bull-bear spread is an additional headache we still have to deal with. The spread is at 34.6%, which is a bad number. Thankfully it's not 40% plus, but any time you're sitting on a 35% spread it's not great news. I would put out a warning flag when it gets to 35%, but we've basically been over that level for quite some time.

It would take a strong correction over the coming weeks to get that level down towards 20% or hopefully even lower. If we got back down to that level and with interest rates near zero, the market would likely launch higher once again. There are lots of negatives for the market for the short term with sentiment one of the key problems for now. Hopefully we can get those numbers down in the weeks to come.

There are other problems we need to discuss, which I have touched upon. We are dealing with sever negative divergences on the daily and weekly charts on all the key-index charts. Again, severe, not just a little bit. You have to believe that at some point those nasty divergences are going to kick in. I guess it's always possible to be permanently ignored, but to be honest, I don't see. They are so bad on all key-time frames to the point where one would think they will have to get worked off.

I can't guarantee anything, but one who's been around for a while would tell you the odds are pretty great that things will move lower in the short term. That said, until the bears can eradicate S&P 500 1833 or the 50 day exponential moving average they have accomplished zero. Avoid froth would be my best advice. Keep things extremely light.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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