What Happens When the Fed Tapers Out of QE?

George Brooks |

I think the Fed erred on two occasions. One, Chairman Bernanke should not have commented on the Fed's exit from QE without a detailed explanation about how it would do so, including a Plan B, etc. if one was needed to fall back on.
Then too, to dispatch a half dozen FR Governors to counter fears in the Street that the exit (taper) may be disorderly, smacked of fear among members of the Fed itself.
But what will haunt the Street more is the reaction of investors worldwide that took place when Bernanke commented on an exit QE within a stated time frame.
The bond and stock markets plunged and interest rates shot up.
Will that happen again when the Fed actually makes its move ?
The result: uncertainty, confusion and unrest.
Friday was the last day of Q2, so some of its action was window dressing for the quarter-ending reports and "reconstitution" of the Russell indexes. The DJIA was down 114 points, as 27 of its 30 components declined with the big loser being IBM, down 4.62. Its stock alone cost the DJIA close to 36 points. At 191, a percent change in IBM has a 5.4 times greater impact on the DJIA than a like change in AT&T selling at 35, since it is a price-weighted average.
CONCLUSION:
Bernanke's comments about tapering out of QE, the frantic effort of a half dozen FRB Governors to stabilize stock and bond markets, and the Street's panicky response may have put a lid on how far up the market can go, near-term.
The plunge in stock and bond markets won't be easily forgotten. What will happen when the Fed begins to taper ? That is in the back of most investor minds.
Prior to the market's peak on May 22, buying was on automatic pilot as money managers invested and re-invested in stocks, which appeared to be the only place to place cash.
That has changed. How much, will become evident in coming weeks.
If the market can shake off the Fed tapering fears, the market has a shot at new highs.
If the bullish "spell" has been broken, uncertainty and anxiety of buying stocks will put a lid on prices.
Near-term, that will be reflected in rally failures and the inability to push beyond resistance levels.
Last week we saw institutional portfolio window dressing for Q2-end reports. This week you will see the same for the beginning of Q3, as money managers re-align portfolios.
Beyond that, is the moment of truth.
Painful as it may have been, the Fed SHOULD NOT HAVE DISPATHCHED all those FRB Governors, and let the market find the "Comfort level" it will have to find when the Fed finally begins its exit.
There is a lot of resistance between DJIA 15.000 and 15,070 (S&P 500: 1,613 and 1,615).Support at DJIA 14,885 (S&P 500: 1,602) in questionable. Breaking that calls for a further drop to DJIA 14,790 (S&P 500: 1,593), near-term..
Investor's first read – an edge before the open
DJIA: 14,909.87
S&P 500: 1,606.25
Nasdaq Comp.: 3,403.24
Russell 2000: 981.58
Monday, July 1, 2013 (9:06 a.m.)
Apple (AAPL: $397.14)
On Friday, I wrote that I felt AAPL's communication with the investment community has been poor, adding at 9.3 times earnings, yielding 3.10% and sitting on a pile of cash, communicating the merits of this company should be a no-brainer. This is an "image" problem. It's like, it is no longer perceived as a great company.
My message to management was to get off their duff and rebuild the image of an innovator, a company with service second to none, and a viable competitor.
Without a big buyer, I said odds not only favor a test of April's $385 lows, but AAPL is "technically" at risk of dropping below that.
On a more positive note, I explained that this kind of "despair" often accompanies a reversal, i.e. the stock passed the "ouch" point, but is now at the "I can't stand it anymore" point where investors simply dump it indiscriminately. A 44% drop over the past year should have discounted a lot of problems.
It got down to $385 before posting a rally to $400.27 before it sold off at the close.
Buying prior to the open may be institutions taking a position it didn't want to show in Q2 reports.

FACEBOOK (FB - $24.90)
FB extended a positive pattern of trading Friday with a spike in volume at the close which was probably related to Q2 ending portfolio window dressing by mutual funds.

ECONOMY:
The Street is now faced with a choice – Is it hoping for disappointing reports and an increase in the likelihood that the Fed won't back away from QE soon ? Or will it hope for upbeat reports, a sign that QE has been helping. It can't have it both ways – For access to information including charts and graphics go to www.mam.econoday.com .
Note: Time of release not available
MONDAY:
Markit PMI Mfg.Ix (8:58) Proj:52.3 for June 13
ISM Mfg Ix. (10:00) Proj: 50.5 for June 13
Construction Spending (10:00) Proj: +0.6%
TUESDAY:
Motor Vehicle Sales: Proj: Domestic12.2 mil. Ann. Rate: Total 15.5 mil. Ann. Rate.
Factory Orders (10:00) Proj: +2.0%
WEDNESDAY:
ADP private payroll employment (8:15) Proj:165,000
ISM Non-Mfg. Ix. (10:00) Proj: 54.5
THURSDAY: July 4 Holiday
FRIDAY:
Jobless Claims (8:30) Proj :345,000
Employment Situation Report (8:30) Proj: 161,000 nonfarm; Private: 175,000
Unemployment rate: Proj: 7.5%
Note: The FOMC: Federal Open Market Committee: 12 voting members, 7 from the Fed. Res. Board, 5 from the 12 F.R. Banks.
Tasks: Oversee open market operations (buying and selling U.S. Treasury securities); make key decisions on interest rates and money supply. Establish a target level for federal funds rate (rate commercial banks charge between themselves for overnight loans between institutions that have surplus balances and those that don't.
George Brooks
"Investor's first read – an edge before the open"
sensiblesleuth@gmail.com
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The writer of Investor's first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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