The Federal Reserve Board released their latest policy announcement detailing an expansion of QE3 and a historic change in policy whereby the Fed will now peg monetary policy to unemployment and economic growth. The market's reaction this expansion of QE3 was even weaker than it's reaction to the Fed's initial announcement of QE3 on September 13. shortly after which the market topped, as the NASDAQ Composite Index gave up on its rally attempt and reversed yesterday to close lower on lower volume. The S&P 500 closed slightly up but also reversed in a big churning day that came on heavier volume. In an interview following the initial policy announcement, Fed chief Ben Bernanke reiterated his belief that the central bank would be unable to stop a recession if Congress were to let the economy go over the fiscal cliff during an interview following the policy announcement, and this appeared to be the catalyst that sent investors scurrying for cover.
The Federal Reserve wrapped up its two day meeting and concluded, as expected, that it would add $45 billion-a-month in Treasury-note purchases to its $40 billion-a-month purchases of mortgage-backed bonds, and would keep the rate on overnight loans to banks in the 0%-to-0.25% level so long as the jobless rate remains above 6.5% and inflation is not forecast to rise above 2.5%. The Federal Reserve doesn’t expect to hit 6.5% unemployment for hiking interest rates until 2015, according to a summary of the central bank’s latest projections. The Fed sees the jobless rate falling to a range between 6% and 6.6% by 2015, compared to 7.7% in November. In addition, the Fed doesn’t see inflation hitting 2.5%, with the highest rate between 1.7% to 2% not until 2015.
The Fed lowered inflation guidance for 2013, 2014 and 2015. Next year’s projected year-on-year rise is estimated between 1.3% and 2%, down from September’s forecast between 1.6% to 2%. The Fed also modestly lowered GDP forecasts for 2012 through 2015, though it still is forecasting growth above 3% in both 2014 and 2015. The Fed's estimates for GDP and inflation should always be taken with a grain of salt, however, given the Fed's poor forecasting track record.
While the Fed's announcement indicates that QE will enjoy a a lengthy extension, the "Fiscal Cliff" issue is still on the table, and yesterday's reversal may be telegraphing directional indecisiveness on the market's part. Another clue that something is not quite right in "QE-Land" is the after-hours sell-off in commodities, most notably gold and silver which were both hit hard after the regular trading session. Copper and crude oil also joined the sell-off, but the action in the precious metals is disconcering considering that the iShares Silver Tust (SLV) did issue a pocket pivot buy point as it regained its 50-day moving average on strong volume. This morning's action in the SLV, however, will likely negate yesterday's pocket pivot move, and the after-hours yesterday in the precious metals action seems more like an event that would follow a central bank interest rate tightening.
Apple (AAPL) remains our top short-sale target as it could not hold another gap-up opening yesterday and closed down on the day. The stock never really got going, even in the face of the market's initially positive reaction to the Fed's policy announcement at mid-day. Google (GOOG), meanwhile, is pushing a little less than 2% past its 50-day moving average on positive news this morning, and we would monitor this carefully for any potential reversal as it is often quite normal for stocks to slide just past a key moving average on the upside.
The long side of the market has remained somewhat limited, and we continue to advise a go-slow approach to buying any stocks at this time, while keeping a tight leash on your stops. The market's expectaion of a "Fiscal Cliff" solution and a subsequent rally in the market may already be built in, so we would not make any assumptions in this regard.