MLR - PMP 10/20/14

Published : October 20 2014 at 9:30 ET

Major averages gapped up Friday at the open on strong earnings reports, sending a number of stocks higher. Volume was lower on the day but above average. The NASDAQ Composite backed off after hitting its 200dma. MDM favorably switched signals but could switch again as volatility remains elevated. Futures are currently roughly flat to down this morning and have been quite volatile over the past 15 hours. Meanwhile the vast number of leading stocks, including broken-down former leaders, remain in broken patterns with little to nothing in the way of possible buy points in stocks developing currently.

The market is hoping the Fed will extend QE3 when they meet Oct 28-29. So we have had a technical bounce closing in on 200dma resistance. Even if QE3 is extended, QE1, 2, and 3 have not healed the economy. So while pushing money into the market will prop it higher, there is increasing concern that QE is not working, so we may eventually reach a point where the market loses confidence in the Fed and heads for the exits.

James Bullard suggested continuing QE3 because inflation expectations are falling as seen in the TIPS yield. He thinks the economy will show enough strength in 2015, but is now concerned about how target inflation is falling below the fed's target rate. Thus more QE3 or even talk about it will hopefully push inflation back up to the fed's target rate. This sounds as if despite his hawkish talk about a 3% GDP economy, he is having second thoughts. Bullard is known to be hawkish as he has suggested higher rates as early as march 2015, but now he is concerned about falling inflation. Part of the problem is that all this bond buying from QE is perhaps artificially lowering TIPS rates, thus making it look as if inflation is below fed's target rate, when in reality, inflation is probably well above the fed's target rate as prices have noticeably increased over the last couple of years across a basket of goods.

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