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Market Lab Report - Premarket Pulse 10/6/16

Published : October 6 2016 at 8:21 ET

Major averages rose on higher volume but finished mid-bar in a show of slight churning action. The S&P 500 remains below its 50-day moving average after reversing at the line on Tuesday's distribution day. Yesterday the index was unable to push as high as the 50-day line as it churned around in a narrower range. The NASDAQ, meanwhile, is hovering around in new-high price territory, but has yet to exhibit any conviction on the upside as it repeatedly stalls on its recent range breakout attempt.

Concerns about negative yields have been mentioned by a number of financial luminaries such as Bill Gross, Alan Greenspan, and Jim Rogers. In light of this, and in step with the Federal Reserve, the European Central Bank is rumored to have discussed when to end the bank’s quantitative-easing program. The move could potentially come ahead of the scheduled expiration of the program in March.

The ECB claims they have yet to even talk about the issue, and that when they do move to end QE, they will imitate the Fed’s approach of tapering purchases rather than abruptly ending them.

Nevertheless, stocks and bonds sold off on the rumor. High stock-market valuations are justified in large part by ultra-low yields, which make equities look attractive, thus QE-capital finds its way into stocks.

While the US ended its QE program in 2014, interest rates in the US remain low due to continued money printing in Europe and Japan. As can be seen from the chart below, total QE from the ECB, BoJ, and BoE total nearly $200 billion each month.

Any mention of tapering has and will continue to set off the stock and bond markets as this QE bubble continues to expand since QE began in 2009. And it's a big one. Indeed, Gross, Greenspan, and Rogers have all said this will not end well. Of course, the bursting of this bubble may still be a ways off.

In the meantime, we continue to guide members to trade with the rhythm of the markets, buying constructive weakness and selling into excessive strength.

 


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