FOMC Rhetoric: January 23 - January 27

Wall Street continues to bask in the glow of our current stock market. In addition to stock trading, Monday’s rally made the highest high for 2012 in the S&P futures. The early morning rallying held the NYSE tick in the plus column for an extended period of time. However, as soon as it journeyed below zero into the minus column erosion began. It had all the makings of a full reversal. A four-point profit was made on our advisory trade. The bonds are nearing a full 5 point correction from the highs above 145 ¼ experienced earlier in January. It is interesting that this January is the worst or most bearish in 9 years. There has been much written about the Federal Reserve interfering with the bonds prices. Wouldn’t it be interesting if they are still interfering by trying to boost prices, but yet we are seeing the worst market start in almost a decade?

A waiting game ensued as the Fed was meeting and many traders went to the sidelines. The volume was very light, but there were not any conclusive moves even with the thinness. Both online trading and pit trading was stagnant. The NYSE tick was docile and that should scare the bulls because once it is triggered for sell programs, we could see some sharp plummets.

Technically, one of my indicators is the length of time without normal movements and programs. This type of market is lulling traders into a coma. I cannot believe that we have not heard another shoe dropping from Europe at some time. The bonds are not receiving the same enthusiasm of a buyer like in early January. Keep in mind that they have been in a mounting bubble for the past 6 months and will eventually burst.

The Federal Reserve had their two-day monetary policy meeting completed Wednesday. Bernanke gave a press conference where he appeared to be on valium. The most interesting and comical part of the press conference was one question asked regarding the republican debates being very critical of the Federal Reserve chief. Benny danced around that question, but it is a very sound question definitely dictating some of his positions. If he were in the private sector he would have been fired long ago. I know he realizes that.

Forex movements were certainly influenced. Gold surged on the FOMC statement reaching $1700 near day’s end. Oil flirted with $100 once again, but did not break the psychological level. Furthermore, the U.S. Dollar was impacted by the Fed’s decision to keep interest rates very low until 2014.

Many times overextended markets are exhausted. They actually become heavy even before a catalyst presents itself. Thursday was an example of higher high and a reverse to below Wednesday’s free FOMC rhetoric. We saw the exhaustion being defined by the lack of plus NYSE tick. On a positive note, our short term advisory recommendation reached it’s profit objective!

The bonds rallied in sympathy with the S&P 500 decline, but are very overextended with an exhaustion blow off at 143 ½ . If it does not close above 143/½ by early next week, the top is probably in place.

An overnight rally took place and then erosion occurred during the intraday Friday. In spite of the excessive moves, the listing ship righted itself once again and made it essentially unchanged on the day. An interesting observation is that Wednesday's euphoria surrounding cheerleading the Fed did lose its appeal. Is the market in maintenance mode or just plain tired? Once again the bonds are marching to another drummer—not correlating with the stocks to any great degree of sensitivity.

Overall, the Fed did create volatility this week, which seems to be their main objective. It appears to me that Benny has an ego that requires fulfillment by creating unnatural influences in both the bond and stock markets. However, the stock market has become better at digesting his false rhetoric than it was two years ago.