Chicken one day, feathers the next. That’s what we saw past week, and really has been the case since May 22 when Fed Chairman Ben Bernanke first hinted about a potential scaling back of bond purchases, or QE. The FOMC had a meeting this past week and in the followup press conference the Chairman did not mince his words. The market responded with a remarkable sell off on that day and followed through Thursday with more selling, this after some strong gains earlier in the week. But was this the lightning rod that may cause more to jump to the sidelines or is there some other catalyst at work?
As we know the Fed has been busy buying bonds for the past few years in order to keep rates low, helping to drive economic growth at least temporarily. This would work to improve sentiment and the hope is businesses will start hiring again, the goal of unemployment in the 6.5% range. The jury is out on the efficacy of such a policy, but who are we to question the motive. Regardless, market players have shown worry and concern, backing up longer term rates and lifting volatility via the VIX. Simply put the uncertainty about timing of ‘tapering purchases’ is enough to get bond and equity holders out of the game and onto the sidelines. As we run up against the midpoint of the year the markets are still up a robust 10% or so and with an upcoming earnings season I find the timing rather interesting.
But we have recently seen more to worry about than we can possibly handle. Is China slowing down their economy and do they have enough control over the resulting landing? Emerging market economies have felt the brunt of a global slowdown, and Europe is still trolling along the bottom looking for any signs of growth. Japan has taken to drastic measures to try and stimulate their nascent growth but their approach is being questioned, the yen has become a volatility machine. Given the recent volatility of their markets and the focus I suspect the high-level attention is not welcomed. Yet, with every sharp move higher in the yen our markets respond with more selling.
What happened to the ‘5%ers’? You know who they are, the ones who said a 5% drop from the highs would be healthy and are ripe for picking. Here we are, and nobody can be found. Are these the dip buyers we constantly hear about? Prices have come in 5% and they go silent. Do we need to see another 5% down, more volatility? If that is the case I suspect a bigger correction will be seen. As a momentum options trader I will see a full change of character in the market – and bearish-type trades will be the norm rather than the exception.