Art Cashin: “Holy Moley!  Maybe It Was "Data Driven" – The Fed shifted policy to shock and awe yesterday by doing nothing.  The FOMC surprised markets in every asset class by not implementing the nearly universally expected “taper lite”.  The reaction was sudden and violent.  Stocks shot up 200 points.  Gold rocketed over $50 (the equivalent of a 450 point move in the Dow).

Virtually every asset had a dramatic instant reaction.  Bonds soared as did things like utilities, REITs, MLPs, and housing stocks.  The dollar plunged.  Some media folks masterfully understated the case, saying the Fed move surprised some folks who had misread the Fed's intentions.  “A few people”?  There was a global reaction – hardly a few people.  And, the change was in billions of dollars, probably hundreds of billions.

Traders were somewhat stunned to hear Mr. Bernanke say that a good part of the decision was based on the negative effect of the recent rise in interest rates.  It was Mr. Bernanke's own remarks several months ago that started that rise in rates.  The Fed could have stemmed or even reversed that rise by hinting that tapering might be delayed.  Mike O'Rourke at Jones Trading succinctly summed up the view of many traders in this paragraph noted by Business Insider:

Right now, the FOMC has “a tiger by its tail” - it has lost control of monetary policy.  The Fed can’t stop buying assets because interest rates will rise and choke the recovery.  In short, today’s decision not to taper was driven by unimpressive economic data, the fear of a 3% yield on the 10 year Treasury and gridlock in Washington.  If the economy cannot handle a 3% yield on the 10 year, then the S&P 500 should not be north of 1700.  It is remarkable that the equity market continued to buy into easy money over economic growth.  QE3 has been ongoing for nearly a year and the economy is not strong enough to ease off the accelerator (forget about applying the brake).  Simultaneously, the S&P 500 is up 21% year to date and the average share gain in the index is over 25%.  Maybe today’s action will turn out to be short covering, but if it was not then paying continually higher prices for equities in a potentially weakening economy is a very dangerous proposition. 

Mike's concern about the follow-through to Wednesday's sharp FOMC response rally appears to have more than a few historical precedents. 

Here are some comments on the topic from ever-vigilant Jason Goepfert at SentimenTrader:

Based on prior positive reactions to Fed statements, it looks like this breakout may have at least a bit more to go.  Usually there is some shorter-term follow-through to these kinds of moves.  It shouldn't take much to quickly shift sentiment into excessive optimism territory, though, and looking at the other recent post-FOMC reactions (see below), that may be enough to trigger another multi-week pullback.  So for now risk isn't yet elevated, but that should change with another 1-3 days of rallying.

Jason then examines the precedents:

With news that appeared to be at least a temporary relief to traders, stocks shot higher after the Federal Reserve announcement on interest rate policy.  That seemingly gives us the “all clear”.  What's not to like - a layer of uncertainty removed, a big up day and a new 52-week high?  But these kinds of days have not been the greatest time to invest.  More often than not, they've occurred soon before intermediate-term breathers in the broader stock market.  The chart above shows the other times this has happened since the market bottom in 2009.  Each one occurred near a peak that took the S&P 500 down more than -7% over the next couple of months. 

The table below highlights the 9 other times since 1996 that the S&P 500 futures managed to gain at least 0.5% on a FOMC decision day, settling at a new 52-week high as well.  Looking at returns over the next 50 days (not shown in the table), there was only one positive occurrence, and that was just barely.  There were 6 times that the futures had gained more than 1% on the day, as happened on Wednesday.  50 days after those occurrences, the futures were negative every time, and all by at least -2.0%.  Its average return 50 days later was -3.9%, with a maximum gain at the best point averaging +3.2% and a maximum loss averaging -8.0%.  This goes somewhat against what we looked at yesterday, with strong performance during a seasonally weak period.  But this data with the FOMC reaction tends to be a bit shorter-term, and wouldn't preclude a pullback before momentum kicked in again nearer year-end.

Art Cashin continues:  (Apologies for not being able to attach the charts and tables mentioned but we think the points are clear.)

So, previous bullish surprises from the Fed tend to have relatively short (days) positive influence as folks realize the new largess is the result of some negative economic strain ... Consensus – Yesterday certainly proved the value of being nimble in a trading environment ... Senator Schumer praises Yellen, prompting some market players to think the fix is in.  As Stan Druckenmiller aptly suggests – they brought another punchbowl.  Let's see if sugar high starts to wane.  Stay nimble and alert.”

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The audio interviews with Michael Pento, Eric Sprott, Andrew Maguire, Grant Williams, Stephen Leeb, Bill Fleckenstein, Pierre Lassonde, Dr. Paul Craig Roberts, Art Cashin, Egon von Greyerz and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

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