MLR - PMP 2/4/14

Published : February 4 2014 at 8:48 ET

The major market averages plummeted yesterday with the NASDAQ Composite falling over 100 points and the Dow over 300 points, closing almost at their day's lows. A number of leaders got hit hard while others, particularly among social-networking stocks like FB, LNKD, and TWTR, were able to hold their ground. A very weak ISM reading plus more economic troubles in China added to the selling pressure. Of course, these are arguments for continued quantitative easing, and QE has helped put a shallow floor under the market since January 2013.

The major averages are now firmly below their 50-day moving averages, off 5-6% from their peaks, and the Dow Jones Industrial Average is off more than 7% as it breaks below its 200-day moving average for the first time since 2012. While things look about to come apart, keep in mind that this was how things looked in June 2013 as well as during other sharp but short-lived pullbacks. With quantitative easing still nearly on full, and Janet Yellin who is considered pro-QE taking over Ben Bernanke's position as Chairperson of the Federal Reserve, the market may be very close to finding a floor.

Further, the Fed has said they would wind down QE entirely by the end of 2014, while keeping Fed interest rates low well into 2015, but if the economy falters, they will have no choice but to extend the life of QE since it is in their interest to keep interest rates low.

The Fed has room to continue to print money since their key inflation gauge, core PCE, is still well within the 1-2% target range. Further, slackened demand from juggernauts such as China whose economy is stumbling mean potentially lower commodity prices overall including oil and gold which reduce global inflation pressures. Indeed, the CRB index has been trending lower since 2011.

As for market sentiment, selling pressure has not climaxed as the put/call ratio has not spiked as much as it has during prior lows, and the market is still not oversold as it had been at prior turning points where the market found a floor. Thus, while the Market Direction Model has switched to a sell signal, we will continue to monitor conditions as always for a potential bounce, but plan to sit tight in the meantime, which could mean a few days or even hours, since corrections in this QE environment tend to be short and sharp.

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