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Since the market began its retrenchment a month ago, we have seen rallies on weak volume and selloffs on stronger volume. Historically, these are the characteristics of Dead Cat Bounces and softer rallies destined to fail.

But over the past few years, we have also seen markets rally on expectations of each and every new Fed intervention. QE4 was trial ballooned on Wednesday afternoon by the WSJ’s Jon Hilsenrath (Fed Stimulus Likely in 2013).

History teaches us that whenever the Fed wants to do a new intervention, they let the Street know by telegraphing their intentions this way. They thinking seems to be, “Don’t say we didn’t warn you.” James Bianco, with tongue firmly planted in cheek, has called Jon “The actual Federal Reserve Chairman.” In reality, Jon took over the slot formerly owned by Greg Ip (now at The Economist) as the Fed’s favored conduit to Wall Street.

Despite the earnings weakness, dividend and capital tax avoidance trades, anemic volume and general complacency, yesterday saw a strong intra-day reversal in US equities. Markets shifted from down half a percent to up half a percent. Some of my technical friends will call this a triple-outside day — opening below the low of the past three days, and closing above the high of the past three days.

What this means is that short term, the 0fficial kick off of the Santa Claus rally is here. Traders can game this for a run up to the September highs.

Investors have a trickier challenge: This likely ends badly, but the QE4 announcement by acting FOMC chair Hilsenrath suggests just not yet. I want to see how markets trade today, but I suspect that there is an upside play for this rally into years end, perhaps even into Q1. Things get much trickier beyond that.

Let’s be careful out there . . .

Category: Federal Reserve, Investing, Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “QE4 vs Dead Cat Bounce”

  1. Volume has been indeed very bearish. Shrinking on rallies and expanding on declines. Furthermore, daily volume at critical pivot points has been very bearish of late. Here you have the chart:

    http://www.dowtheoryinvestment.com/2012/11/dow-theory-update-for-nov-27-markets.html

    Furthermore, there is an uncommon agreement between Dow Theory practitioners about the existence of a primary bear market. While such unanimity might be construed as a contrary indicator…:=), the implications are bearish for the next months.

    http://www.dowtheoryinvestment.com/2012/11/dow-theory-recap-what-are-other-dow.html

    Regards

  2. Moss says:

    How long can the Fed, and therefore monetary policy, cover for the inept, dysfunctional political class? At some point the printing press remedy will not work. Since the ROW is in the shitter US remains the least worst. All the cash needs to go somewhere.

  3. rd says:

    I assume that Helicopter Ben is trying to help his buddies out here giving them one good boost in the markets before year’s end so they can sell under old capital gain and ordinary tax rates with a good profit.

  4. VennData says:

    What is Jack Welch doing?

    I’d find out whatever he’s doing, and do the opposite.

  5. VennData says:

    Can you please moderate VennData? Or find another, more Chicago-guy way to keep him quiet? I’d drop a neutron bomb on him if I had any left. Anyway, I’ve sold everything. Gone straight to cash. You can’t have a market work when it’s run by liberal tax and spenders. Remember what happened under Clinton? Roosevelt? Lincoln? I don’t care if I’m down in the short term. It’ll come back. I am always right, always have been. You’ll see.

    – Jack Welch.

  6. wally says:

    “Investors have a trickier challenge” “Investors” meaning market timers in this case? Otherwise, an investor really only has the challenge of buying something worthwhile at a good price.

    ~~~

    BR: Traders are just that — in and out in seconds, hours or days. Investors have a longer time horizon, typically measured in months or years.

    Don’t overthink the definitions of simple words . . .

  7. b_thunder says:

    Bernanke told the world months ago that he equates letting ANY of his “easing” programs to expire to “tightening.” He also promised to “not tighten” until at least 2016, right? Or 2017? Or 2022? – I lost count of his promises… But anyway, the expiration of the “Op. Twist” in his mind is clearly “tightening”, so I can’t see how what Hilsenrath has scribbled today is a surprise. And if it’s not a surprise, how can the stocks rally on that for any sustained period of time?

  8. CSF says:

    Tricky, indeed. About 10 days ago Doug Kass said on Bloomberg that he was going net long because of bearish sentiment and overblown fears about the fiscal cliff. On the other hand, we’re well off the bottom of the recent correction, and I sense that it might be greedy to increase one’s long positions today, especially if I’m a long-term investor who’s concerned about the longevity of what looks like a cyclical bull market in the midst of a secular bear market.

  9. Crunchy Breaded Fish Sticks says:

    “the 0fficial kick off of the Santa Claus rally is here”

    Barry,

    You have pointed time and time again how the day-to-day is just noise. How do you know that yesterday wasn’t?

    Thanks!

    ~~~

    BR: I don’t.

    I try to avoid absolutes — its noise MOST of the time. But the intraday reversal on Friday Nov 16th was significant, and supported the bounce thesis.

  10. petercoldgrave says:

    Barry,

    In recent weeks, you’ve been noting that 3Q profits were disappointing, but how does that square with this, which indicates that 3Q profits rose?

    http://wsj-us.econoday.com/byshoweventfull.asp?fid=451387&cust=wsj-us&year=2012&lid=0#tab1

  11. ComradeAnon says:

    VennData,

    My guess would be that Jack Welch is being felated on CNBC. Isn’t that all he does these days? Besides “The Twitter”?

  12. 4whatitsworth says:

    I think you are right about a short term rally. I think I heard Obama say come on guy’s lets kick the can send me a bill I have a pen and I just need to punish the rich a little because the American people have spoken and I won, I won, I won! Also, surprisingly housing is still looking ok and there is so much uncertainty that I am not seeing the layoff announcements that I thought I would. The fog of indecision continues to paralyze and any move will be followed and the next move is likely higher.

    I am definitely an investor and way to slow and thoughtful for trading. The problem at the moment is what to do with all this cash. I am also holding small positions in stocks that pay nice dividends if this thing ratchets I may get out of those and I need to really evaluate my long term tax deferred positions.

    In the long run there are clearly big problems ahead:
    ->US culture of expectations without responsibility (I want the benefit but don’t even think about making me pay for it)

    ->The government is out of its favorite tool interest rates. 0% Interest rates and no one interested so what now.

    -> Generational leftovers from “the worst generation” by the time the baby boomers are done with their great cultural experiment the next generations will be truly f*cked and that is not likely to encourage work.

    ->Bought and paid for political leadership that lacks both backbone and the ability to negotiate a meaningful compromise.

    -> The energy and housing boom is likely to be short lived.

    -> The current debt position is unlikely to support big infrastructure investments that will create jobs (This should have been done earlier)

  13. Greg0658 says:

    “the worst generation” .. if that is plant from my seed :-| I gotta add imho we have grown quite a bit over my generation in IQ#s .. sure the greatest generation returned from WW2 with a victory and generally the only factory intact .. then naturally started having kids – next created pension systems that worked in their favor with free years credit to get almost out to pasture folks to raise their hands and start seeing a deduction from their paychecks

    another story from the bar stool and from experience in another hat I wore years ago .. painting rocks around the flagpole white – flip them over to paint em on the backside – then they get dirty again – scrub em – paint em …. story end > “whats wrong with that” :-\ help waiting for a job to do – tho preferrably a real job

    4what – that same sentence of yours is what scares me the most ..
    along with a little thing called hands on apprenticeshipping

  14. 4whatitsworth says:

    @Grego, The generations following the baby burners are smart but they are also “trust averse” and as you apprentice them they look to jump ship ASAP. Now that jobs are scarce there is more of an appreciation but it is going to take a long time to restack the culture but at least we are dealing with kids that mostly have their information right everyone goes to salary.com ;-)

  15. adrian.who says:

    BR, you would tend to do some changes in our asset allocation model? Thank you, sir!