A few thoughts on the Fed:
We are here to help you make better investment decisions, not bash the Fed (or anyone else, for that matter). For years, we have argued that policymakers look at markets first and everything else second.
The Fed's Third Mandate: Markets
Everyone wants us to believe that the Fed has a dual mandate: Help the economy (jobs) and keep inflation near 2%. We argue that the Fed's third (real) mandate is to create policy that helps markets. Don't believe us? Let's look at the facts:
Markets Dictate Fed Behavior
The 2008-2009 financial crisis sent stocks and the overall economy plunging. The US stock market fell into a vicious bear market, and the US economy plunged into the "Great Recession." So on November 25, 2008, the Fed announced QE1 - which was a massive program to flood the system with liquidity and began printing billions of dollars everyday to help stabilize markets and the economy. That wasn't enough, stocks continued to fall. Then, in December 2008, the Fed lowered interest rates to zero and shortly thereafter, in March 2009, stocks bottomed. That ignited this 6.5 year bull market.
Print Baby Print
In 2009 and 2010 stocks soared. Then, in April 2010, stocks topped out and fell 11%. Then the Fed announced QE 2, which began on November 3, 2010, and once again, stocks soared. Stocks placed another intermediate term top in May 2011, one month before QE 2 ended on June 3, 2011. Then stocks fell 21% from May 2011 to the Nov 2011. What happened? You guessed it - the Fed announced Operation Twist from September 21, 2011 to December 12, 2012, and stocks rallied. At the end of 2012, stocks hit a wall, and once again the Fed announced QE 3 in September 2012. Stocks didn't rally, so they doubled up in December of 2012 and stocks soared for all of 2013 until QE 3 ended in October 2014. Then the QE trade evolved, and other central banks began printing gobs of money to stimulate markets. Stocks shot higher at the end of 2014 and moved sideways for most of 2015, as the Fed toyed with the notion of raising rates by a quarter point.
September Fed Meeting
At the beginning of the year, the Fed told us they will raise rates in June or September. June came and went and nothing happened. Then the focus shifted to the September meeting, and the markets moved sideways. Then, in late August, a few weeks before the September meeting, stocks plunged and the Fed blinked. Instead of rallying, stocks fell last week when the Fed decided in a 9-to-1 vote to hold rates near zero. Then, one-by-one, several Fed officials came out and reversed their stance and said the Fed should raise rates in 2015. That culminated yesterday with Dr. Yellen's speech when she said the Fed will likely raise rates in 2015. They want us to believe that a 9-to-1 vote was reversed in a week. Forget the Fed dots, we'll let you connect the dots.
Stocks fell last week as the major indices continue to move sideways to consolidate their very steep late-August sell-off. We do find it interesting that with all the volatility we have seen since the late-August decline, the S&P 500 and Dow Industrials have had relatively "tight" closes over the past three consecutive weeks. Here are the past three weekly closes for the S&P 500: 1961, 1958 and as of noon on Friday the S&P 500 is trading near 1947. At this point, that simply means that the market is comfortable trading near these levels and is "setting up" for the next move. The longer the major indices spend below their important 50 and 200 DMA lines, the weaker the market gets. A new downtrend began when the S&P 500 sliced below 2040 on August 20, 2015. Therefore, the bears remain in control until the S&P 500 trades back above 2040. To be clear, we expect this sloppy/sideways trading range to continue with first level of resistance near 2020 and support for the S&P 500 near 1867. Clearly, the Fed is "market" dependent, not "data" dependent.
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