Major averages fell on higher volume, erasing the small sideways gains it had made over the last few days. The selloff was prompted by Atlanta Fed President Dennis Lockhart who said that he would support more tapering if the economic recovery continues. Of course, the economic recovery is still far off if one factors in the distorted figures that are painted to make the economy look healthier than it is in reality. This tug-o-war between what the Fed governors say with respect to tapering and full bore quantitative easing is expected to continue this year as it did all year in 2013. The reality is that QE in some form is expected to stay for an extended period since Bernanke has said that he expects interest rates to remain at historical lows for a prolonged period. Thus the Fed has no choice but to continue to print money in some form, whether it be via the monthly $75 billion in bonds or some other manipulative trick. They will print or default, and default is out of the question. Another lowered credit rating of US Treasurys will hike rates. Such a situation must be avoided or the debt load potentially becomes unserviceable.
Other major central banks continue to print in full measure around the planet. This artificially manipulated environment is bound to continue to prop stocks. Should interest rates start to climb, the debt load will go from onerous to potentially disastrous, unless the climb in rates is due to a genuinely recovering economy. In such a scenario, wealth is actually being produced through productive means rather than by the artificial out-of-thin-air printing of money. There has been scant evidence that a bona fide recovery is taking place.
A number of leading stocks were hit yesterday on heavy volume, some reversing sharply after moving to new highs earlier in the day. While one day's action is not necessarily a sign to run for the hills, investors should stick to their stops and not allow any positions to get out of control on the downside. This morning we are seeing rebounds in a number of these stocks pre-open, and it remains to be seen whether such rebounds hold or not. More downside reversals in leading stocks would build on yesterday's negative price/volume action, and investors should be alert to this in real-time.