In one of most off color descriptions of the Fed’s stimulus programs, former Dallas Fed President Richard Fisher said on an interview with CNBC that the Fed used, ‘cocaine and heroin’ through the use of quantitative easing and zero borrowing cost to stimulate the economy, and that today the economy is maintaining on ritalin.
The S&P futures were already on shaky ground when Fischer came on CNBC and basically said the Federal Reserve had used up most of its available tools. The ESH16 traded higher during Tuesday’s night session, but started selling off just before yesterdays 8:30 open, and continued to sell off after. The overall price action was weak, and despite a +10 handle bounce, the futures tanked down to 1978 after Fischer comments on CNBC’s SquawkBox. After the recent volatility many traders and analysts alike are confused. Are the markets in trouble? Now that all the stimulus is over and the S&P has rallied over 220%, and despite rising asset prices, CNBC’s Sarah Eisen noted that QE produced no noticeable wealth effect on Main St, Fisher responded by saying:
“It just took longer and it took longer because we have absolutely feckless fiscal authorities, the Congress and the president of the United States,” Fisher replied.
Well, it sure did, and at the end of the fed’s programs there has been a lot of debt piling up. The markets and the public are finally starting to get a look at the aftermath of all the quantitative easing. With the rest of the world now moving in the same direction as the US one has to wonder how the global shrink down is going to play out. One of the things that worries me is that if the patient (the US economy and stock market) was on ‘cocaine and heroin,’ what the effects will be as the withdrawals start to take place. It’s common knowledge that most heroin and cocaine addicts will relapse, and if the comparison is true, that means another big drop in the stock market could come at any time. While I am not in the camp that say this happens today or tomorrow I am worried about a global domino effect that some morning we wake up and China is down 10%, and Europe is down 6% to 8%, and the markets start to crumble in the US. I have never felt the fed’s policies were lasting policies, and just to hear Fisher talk about a disconnect between the economy, that the objective was to create a wealth effect, that yields are the lowest in 239 years and that there could be a 20% to 30% stock market correction, all seem inline with what we are seeing today.
As a street guy that worked on the trading floor for over 38 years I have been part of every stock market event since 1985. I knew then, and I know now, that there would be hell to pay after the credit crisis came to an end; and I really don’t believe it ever ended. What the markets and economy are stuck in now is the aftermath of the government’s policies. The larger problem is that it’s not just in the US. Japan has been stuck in a zero borrowing cost environment since 2001 and now the ECB has adopted the same policies. The world may be awash with cheap money, but it cannot, and will not, go one like this forever. I think the next real stock market sell off will be more severe than 2007.
As trader we live in the here and now, and right now the S&P is not going down. Despite the negative overtones the S&P looks like its back and filling under the 1980 level. So far this week the ESH has been up a day / down a day, and while the S&P has attempted to pull back / sell off, I get the feeling the markets are going to hold together right into next week’s March Quadruple Witching. After that we should see them start to move lower the week of March 20. The options stats show the Monday after the March Quad witch being a down day. Until then I think it’s a buy breaks market. I asked on Periscope on Tuesday, when the ESH16 was trading 1980, where traders thought which direction the next 50 handle would be, up or down; I said up. You can take it from there…
In Asia, 6 out of 11 markets closed lower (Shanghai Comp -2.02%), and In Europe 9 out of 12 markets are trading higher this morning (DAX +0.59% ). Today’s economic calendar starts with the Jobless Claims, Bloomberg Consumer Comfort Index, Quarterly Services Survey, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 10-Yr TIPS Announcement, 30-Yr Bond Auction, Treasury Budget, Fed Balance Sheet, and Money Supply.
CHOP FEST
Our View: The trade has been good to me, but it’s been a major chop fest, and I don’t think that’s going to change anytime soon. You can’t buy into the rallies and you can’t sell into the weakness. Patience is the name of this game right now. Getting in and getting out and not falling in love with your positions is also how this is working. There is an abundance of buy stops that start above 2004.70 that go all the way up to 2012, above that level the stops run right to 2018 which puts the PitBulls 2020 level on target. Our view is twofold; the first part is we think higher overall, and the second part is to look for the PitBulls Thursday / Friday low the week before the March Quad Witch. Our view is to sell the early rallies and buy weakness.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 11 markets closed lower: Shanghai Comp -2.02%, Hang Seng -0.06%, Nikkei +1.26%
- In Europe 9 out of 12 markets are trading higher: CAC +0.30%, DAX +0.59%, FTSE -0.15% at 5:30am CT
- Fair Value: S&P -10.73, NASDAQ -12.15, Dow -109.95
- Total Volume: 1.7mil ESH (300K mini roll volume) and 10.6k SPH
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