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Easy Money and the Damage Done

today

Today we got the first shot over the bow from the Federal Reserve that the easy money we have seen over the past few years has a termination date. It is pretty clear from the chart above (that represents today’s S&P 500 Index action) exactly when the words left Fed Chairman Bernanke’s mouth because the stock market immediately dropped 200 points.

It’s kind of late tonight so the post will be short, but I wanted to give you a heads-up on the situation and put it into perspective:

200-day

By now, you are pretty familiar with this graph. This is after the close today and it shows that once the S&P 500 Index dropped below that upper blue band (which represents the key 10% level above the 200-day moving average – the 200-day is the green line on the graph) the market has been unable to move back above. Today’s news continued the recent give-n-take between the upper blue band and the 50-day moving average (another key level).

What I am looking for tomorrow is a sign for the future direction of the market: will the market drop below the 50-day moving average and head toward the 200-day moving average or will it shrug off today’s comments by the Chairman and try to retake the 10% upper band.

Stock investors have gotten giddy with the financial heroin known as easy money through the quantitative easing program provided by the Federal Reserve that has inflated stock prices above fundamental values.

Today was the first dose of reality that the mass investing public has received – so it will be extremely interesting to see what happens.

My hope is that we pull back toward the 200-day moving average to relieve some of the excess valuations, shake out the temporary investors, and then set us up to move higher again based upon actual corporate earnings in this 2% GDP Growth economy.

As this all unfolds, I will be back with more commentary – but we will be using this as an opportunity to put some more of the cash we raised earlier this year to work in solid companies that have already corrected double digit percentages.

Good night and enjoy this from Neil Young…


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Mark