I was busy the second part of the day as some equipment went crazy, so I am a bit pressed for time tonight to get caught up and get some other things done.
Reaction is Highly Exothermic
When I wrote last night's post I had a feeling that the lift in markets was not just do to some wishful thinking and people holding their breathe. I figured some kind of change was on the way that would be seen as positive. I had hoped perhaps FED head Bernanke may want to reel in expectations in the face of high oil and a rising stock market, but nothing like that happened today.
The Thermite Reaction was initiated.
The FED statement was fairly tame, and my first reaction was "is that it?". It was later in the press conference that Bernanke made it clear, more easing is on the way and the FED has even gone greenlight on targeting inflation at 2%. Calculated Risk has a great rundown and you can see it here:
Analysis: Bernanke Paves the Way for QE 3
I would argue that the FED has lost their minds here. They cannot control WHERE cash will flow when prompted by such a policy and there is sure to be serious ramifications from this action going forward. The FED is always behind a curve and inflation may run well ahead of target before unemployment drops by a large margin, if at all. Unemployment is a structural problem, not a cyclical one, but the FED is still stuck in the past. Nothing can be done to stop them. No one really wants to. Sad, but it is what it is.
As is, the last 3 weeks have reminded me of another time and that was in the summer of 2010. In August the FED opened the door to QE2 at the Jackson Hole meeting and markets ran from there all the way to the actual implementation. A small correction happened in November, but it was not large. That run went all the way into February 2011. The whole way many, myself included, thought the run up was nuts and made no sense. Here is a daily chart look:
Greece is small, and it will take Portugal a while to get bad. It's an election year so the money and promises will be flowing for all kinds of things. The push from the FED today could result in a great trading market environment lasting weeks to a few months.
My plan is to stick with individual stocks. Play the best set ups with the best patterns and observe price action that way. The indices may fluctuate but the 100% correlated market has been broken up. If this is a huge fake out, it will be clear as more and more names start to fail trades.
Sentiment is running very hot here, and that can usually be a contrarian indicator. But nothings ever never, and nothings ever always. When the animal spirits are set loose, calling them back proves a difficult task.
Have a good night.