The stock market took it on the chin a little bit yesterday, but it came on breadth that was basically flat for the S&P 500, the Nasdaq Composite and the NYSE Composite indexes. It also came low volume of less than 3bn shares on the composite volume. Therefore, it was not something that create a lot of concern among investors...at least not yet. In fact, one pundit that we highly respect mentioned yesterday that each of the previous four weeks saw the lows for the week come on Monday, so if we can continue that trend, the market should do well the rest of this week. Needless to say, there is certainly no guarantee that this trend will continue, but either way, it’s going to take more downside follow-through at some point this week before investors start getting nervous.
It was interesting to hear that Atlanta Fed President Bostic said yesterday that although the Fed will consider tapering back on their existing (massive) QE program, he also said that it would unlikely to take place this year. Therefore, Mr. Bostic was sounding a bit less hawkish than he was last week...which is bullish.
However, we’d also note that the Fed does not have to officially end their QE programs in order to become less accommodative. One just has to look at the way they pulled-back on the liquidity reins over the summer (when the pandemic faded for a while)...which led to a 10% correction in stocks shortly thereafter (in September). Thus we don’t have to see an official ending to their present QE program...for liquidity to become less plentiful.
Then again the Fed could certainly still keep the pedal to the metal going forward. However, if they continue to do so as the pandemic fades in a serious manner, it won’t allow the economy play catch-up to the economy. The stock market will merely remain very expensive for a long time...and THAT will risk (insure) the inflating of up a bubble that will ruin the economy eventually. So one has to ask whether the Fed will be willing to keep the liquidity spigots WIDE open going forward...or merely wide enough to keep the fixed income markets stabile, open, and running.
This goes back to something we said in our weekend piece this past weekend. The Fed did a great job last March...at a time when the financial system was in dire sharp (much more dire than most people realize). However, they cannot keep the stimulus flowing in a massive way once the pandemic fades and the economy gets running on its own again...even if it creates some headwinds for the stock market. What we’re saying that if the Fed does the responsible thing and cuts back on their massive stimulus, investors should not blame the Fed for any correction that results.
However, if the Fed keeps the spigots wide open...even after that liquidity is not longer needed to keep the credit markets stabile and the economy growing...THAT will be something the Fed SHOULD be blamed for in the future. In other words, it will be irresponsible for them to do that...because they will only be inflating a bubble...and THAT will create another crisis at some point in the next few years......The Fed did their job last March by keeping the system from imploding. There are those who think that the Fed’s job is to keep the stock market rallying. That’s not the case. In fact, if they keep it rallying strongly at these valuation levels, they’ll merely be insuring that another crisis will take place before the next presidential election.
People are up to their eyeballs in comments about Bitcoin, but we think that the action in this asset over the next week or two is going to be quite important...so we’re going to highlight it again this morning. Besides, since we think much of the recent rally in Bitcoin...and the broad stock market...have been liquidity related, the next move in Bitcoin should be important for the stock market as well.
The drop of the last two days was quite reminiscent of what happened on two other occasions. The first one was just over a week ago...the other one was at the late 2017 high. In all three cases, Bitcoin got hit hard over just a few days. In the example from January 3 & 4, it was able to follow that bounce with a VERY strong rally (of 40%) to new all-time highs just a few days later. The example in 2017 was also followed by a strong bounce, BUT it did not make a new high. Instead, that bounce gave it a “lower-high”...and then it rolled back over and made a “lower-low” (below that initial 20%-30% drop)...which led to a VERY sharp decline in Bitcoin.
Therefore, we’ll be watching to see if this week’s sharp drop is followed by another higher-high...which will be quite bullish...OR if it is followed by a “lower-high/lower-low” sequence like we saw three years ago. If we get the latter, we’re not looking for a repeat of that 2017/2018 decline of more than 80%, but it should be something in the 30%-40% range...and it should stay down for a longer period of time than we have seen over the past 10 months.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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