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MLR - PMP 10/13/14

Major averages fell hard on substantial volume. The S&P 500 sits right at its 200-day moving average and its early August lows while the NASDAQ Composite has undercut its own 200-day line and early August lows. The Dow Jones Industrials also undercut its 200-day moving average on Friday but is holding above its early August lows. The VIX spiked to above 20 which it has done three prior times since QE3 began in Jan 2013. Each time, this occurred right at or within a couple of days of the market low. That said, QE3 is ending, thus should the market continue to correct, we could see the VIX spike to much higher levels as it did in 2011 when QE2 ended with the VIX spiking to 48.20. This period of heightened volatility could swing wide in either direction, heading lower if the pace of selling continues, heading higher on a hard bounce.

Adding to the selling pressure was the sell-off in semiconductors and the IMF's downgrade to its global growth forecast for 2014 and 2015 which triggered fears of another recession in the Eurozone, which would be the third recession since 2009. While the US markets were able to buck the downturn in the Eurozone's last recession which began in 2011, both times in 2011 first when semiconductors underwent a bear market of their own, then when the Eurozone went back into recession in the third quarter that same year, both together triggered a 20%+ selloff in the S&P 500 and NASDAQ Composite.Central banks seem unable to resuscitate economies with quantitative easing so what's next? A loss of confidence in the Fed would be a psychologically heavy burden for the market to bear.

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