The Fed Remains now what?

by Jay Pestrichelli on September 19th, 2013

The Market’s reaction after yesterday’s Fed release that the Quantitative Easing program will continue at full strength was about as strong as any I’ve seen before. The day finished in record territory with new highs for the S&P 500 and the DOW. But can it keep going up from here?
From a fundamental perspective, the market is obviously upside down. The whole reason to not reduce the QE purchasing program was because the Fed has deduced that the economy is not strong enough to stand on its own. We know corporate earnings have not improved very much year-over-year. Certainly not at a rate sufficient enough to justify current prices. Unemployment and inflation targets are still below where Bernanke wants to see them. All bad news and should push stock prices low. However, that’s not happening and it doesn’t look like we’ll get out of this Bizarro world of opposites any time soon.
Technically speaking, we have maintained the upward channel of higher highs and higher lows with the 50 day moving average clearly above the 200 day. Both define a bullish trend. However, when looking at some of the momentum indicators, take RSI for example, the market is showing signs of being overbought. That has historically been a sign for some selling. All of those points can be seen on the chart below.
We wrote at the end of August a little about how the market has performed historically in September and in the 4th Quarter in a post titled: Some End of Year Optimism.
It highlighted that although September is historically the worst month of the year, this year was setting up for some contrarians to take on some risk. It also outlined that Q4 is also a very strong quarter and even stronger when September has positive returns.  Well it’s pretty clear September is going to be a positive month as it has already posted a 5.7% gain since the close Aug 30th.
This post promted a lot of additional questions from Buy and Hedge readers, so I thought I give a little more color around the years September is strong. Here are some data points:
  1. Q4 is up (Sept 30th to Dec 31st) 78% of the time since 1950
  2. When Sept is up, Q4 is up 82% of the time
  3. When September is up, only 2 times since 1950 has Q4 been down more than 3%
  4. The worst Q4 when Sept was up was -10%
  5. When Sept is up over 5%, Q4 has never been down
The one really poor quarter of -10% occurred in 1973. And even though September was a winner that year,  that 4th quarter occurred right in the middle of the stock market crash of 1973-1974. Here’s an excerpt from Wikipedia that spells it out pretty well. Click here for the full post.

The 1973–1974 bear market was a bear market that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom,[1] it was one of the worst stock market downturns in modern history.[2] The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year. It was a major event in the 1970s recession.
The troubles this market faces today (Syria, Debt Ceiling, Tapering of QE, and Partisan Disagreement) pale in comparison to what happened in 1973. While we understand we are in an environment of extreme Fed accommodation, history tells us the risk of a major sell off in the next few months is low.
So here’s the score card:
  1. Fundamentals say Sell
  2. Technicals are mixed
  3. History tells us to Buy
Not sure I’ve seen a more mixed message about direction in a while, but when in doubt, the trend is your friend and the bears will probably have to wait a little longer before they get their day in the sun.

Posted in not categorized    Tagged with no tags


Leave a Comment