TAPER talk is just that: TALK!
TAPER LOOMS! sky falling, markets crashing, end of world! LOL
Markets extended & pulled back not because of TAPER talk but because of TA & FA.
I do not think the CORRECTION is over.
Anyway, here is an interesting column:
Bulls Regain Control Of The Market As Fed Taper Looms
Correction Is Over For Now
After nearly a month of selling pressure, the rally over the last couple of days came on cue and supported our recommendation to increase exposure to equities. As noted by Barron’s:
“Market sentiment is getting more buoyant. Thursday, the S&P 500 saw its largest gain since March 5, according to Instinet. The percent of stocks on the index that rose, 95%, was the highest since June 21. Friday, about 90% of components were positive. Instinet sees a high likelihood that the index will reach 4.570 fairly soon, for a more than 2% gain.”
Two factors are driving the rebound. Earnings, so far, are coming in above estimates. Such isn’t surprising as analysts suppressed estimates going into reporting season. Secondly, bond yields declined.
However, there are still reasons to remain cautious near term. As shown below, the internals of the market, while improved slightly, remain negatively diverged. The number of stocks above respective 50- and 200-dma remains low, the bullish percent index remains weak, and relative strength declines.
Furthermore, most companies haven’t reported earnings yet, and macroeconomic challenges still exist. So far, large banks beat estimates on reduced loan loss reserves, but they don’t deal with supply-chain limitations. We are about to see earnings from companies directly impacted by, and don’t benefit from, higher inflation, labor costs, and supply line disruptions.
Technically, If the current rally is going to push back to all-time highs, the market’s underlying strength must begin to improve markedly over the next couple of weeks. If not, the current rally will likely fail sooner than later. Furthermore, the odds of a correction increase as the Fed begins to reduce monetary accommodation.
FOMC Minutes Confirms Taper Is ComingIn the most recent release of the Federal Reserve’s FOMC minutes, the much anticipated “taper” of bond-buying programs got confirmed. To wit:
“The illustrative tapering path was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year.
The path featured monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS). Participants generally commented that the illustrative path provided a straightforward and appropriate template that policymakers might follow, and a couple of participants observed that giving advance notice to the general public of a plan along these lines may reduce the risk of an adverse market reaction to a moderation in asset purchases.“
While the Fed did not explicitly discuss rate hikes, as noted in our Daily Commentary, the futures market has already priced in two rate hikes next year.
Between reducing bond purchases and lifting overnight rates, the risk to investors is more than evident. As we noted in “3-Things That Will Trigger The Next Bear Market:”
“The risk of a market correction rises further when the Fed is both tapering its balance sheet and increasing the overnight lending rate.
What we now know, after more than a decade of experience, is that when the Fed starts to slow or drain its monetary liquidity, the clock starts ticking to the next corrective cycle.”
The problem for the Fed is that while they suggest they will “adjust” based on incoming data, they may well get trapped between surging inflation and a recessionary economy.
https://realinvestme...-looms-10-15-21
