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MLR - Premarket Pulse May 23, 2013

Futures are pointing sharply lower this morning following yesterday's ugly, massive-volume outside reversal day on all the major market indexes. Markets were volatile yesterday as they first rallied sharply in the morning following Fed Chairman Ben Bernanke's comments that removing QE too quickly would carry "substantial risks." This sent stocks and precious metals jacking to the upside, but these rallies were short-lived as the Fed policy announcement later in the day sent the markets into full reversal mode, with the NASDAQ Composite taking the brunt of the selling. QE has put a floor underneath these sell-offs previously in 2013, but it remains to be seen how this current sell-off develops.

Both gold and silver also showed high volume reversals yesterday but this morning both are rallying even as stock futures sell off. This is an interesting divergence coming in spite of the Fed signaling a potential slowdown of QE as early as June, and may be signaling a move towards a safe haven as global markets also sell-off this morning. While potentially higher interest rates in the future are usually bad for gold, it is also an indication of instability as higher rates are a big negative for European countries who cannot print money, thus we could see a rally in precious metals as a result.

This could be the start of further downside, so conservative investors may wish to take profits here. On the other hand, a case could be made that QE so far has put a floor under the market, and QE is still firing on all cylinders from central banks in US, UK, Europe, and Japan. Further, central bankers such as Bernanke are good at talking and making potential changes to QE without actually taking action. Meanwhile, much of the world is mired in recession, banks still are not eager to lend, and there is questionable reliability as concerns economic data. So while the economy remains weak, QE will remain in force. Should the economy show signs of sustainable strength, this will be good for the market in terms of a revitalizing economy but bad for the market in terms of slowing QE. At the very least, investors should adhere to their stops and trailing stops in handling individual stock positions at this time.

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