Beware of the Frankenstorm: October 22 – 26

The previous S&P 500 intermediate low was at 1415. We tempted that price to launch the week, but the temptation to go lower was throttled. Therefore we are really developing some weak foundation for the short term. However, closing below the 1415 means we are into a stabilizing phase. The bonds had a quiet Monday with most of the movement being within a half point throughout the day. We saw low volume; indicative of selling a buying pressures being at a minimal. The bonds did not rally as correspondingly as much as the S&P declines Tuesday. Therefore the asset allocation out of stocks into bonds was minimized prior to the FOMC meeting. The bonds did not rally as correspondingly as much as the S&P declines today. Therefore the asset allocation out of stocks into bonds was minimized. The market environment seems to have taken its eyes from the focus of what action and what rhetoric the Fed utters. The overall muted response following the FOMC announcement denoted the environment influence is changing. Psychologically, approaching 1400 for the second day in a row and there were not rallies able to gain traction. It is very interesting to me to see how the same exact words the Fed uses in this environment fail to energize bonds. They use their reducing interest rates, suppressing long term rates for extended periods of time and a conviction that their policy is correct. All of this is a real yawn for bond traders and the reflecting price movements reveal that the buyers and sellers are unimpressed and perhaps even ignoring the fed anymore.

We will have a sticking rally sometime in the near futures that should be able to mount a continuing rally. The bonds probed 146, which means this is a potential short term bottoming process. However if we close below 146, it has fallen off the cliff. If we can mount a sustaining S&P rally, I think the bonds could be in for more downward pressure. We will see.

There was an S&P pattern recently whereby all rallies have aborted. This pattern needs to be adjusted and then converted to rallies being able to maintain their gains. We will see how the end of the month develops and keep the Frankenstorm in mind. It could create some trepidation and fear going into early next week. Friday probably represented the most blatant example of Fed intervention buying I’ve witnessed in a while. The resulting gains held bonds at their highs most of the afternoon paying absolutely no attention to any correlation with the stock market. They are on a buy agenda with one buyer. The massive computer used to manipulate these prices was turned on, firing on all cylinders with high horsepower.