Look at the chart below and it is clear that Ben Bernanke's announcement of QE3 triggered a classic "Buy the rumor, sell the news" type reaction in the market. The market rose for literally a few hours after the epoch-making announcement. After that, it has been all slow grind and chop sideways.
Are we setting up for a major market selloff? I don't think so, not until 2013 anyway. The Fed's aggressive monetary move was largely discounted by the market in the four-month rise into the announcement. Rather than provide the rocket fuel to soar higher, the action has raised the floor below it. This all nicely sets up share prices that are more likely to tread water instead of visiting the moon.
Check out the next chart, and we have not even touched the 50 day moving average at 1,415 for the (SPX) three weeks into the brave new world. That could well be the final target in the current correction. That assumes that the upcoming earnings season delivers Q3 results that are anything less than horrific. They are more likely to be flat, hence the big yawn we are seeing in share prices now.
This is why I bailed on my Apple (AAPL) long, which held a hefty 30% position in my model trading portfolio. My remaining positions are cleverly structured to reach maximum profitability if the underlying prices go up, sideways, or fall less than 5% over the next two months. As for Apple, I am waiting for the next puke out day to go back in, and then it will be in a bull call spread $50 further out of the money and longer dated.
This logic applies to all asset classes except the precious metals. Gold (GLD) ground to a new all-time high against the Euro at €1,386 in London yesterday, and silver (SLV) was not far behind. It reached a seven-month high against the greenback.
The president of the Federal Reserve Bank of Chicago, noted dove, Charles Evans, had the kindness to say that unemployment would not fall to 7% until 2014, and that the Fed could not reel back on monetary policy even if inflation becomes a threat. Kaching! One cannot imagine a higher octane gasoline to pour on the flames of the gold market.
To see where Evans is coming from, please examine the weekly jobless claims reported by the Department of Labor for the last two years. As long as we are stuck in the 350,000-400,000 range, recession is solidly on the table. Watch stocks track this chart tick-for-tick.
Gold received a further assist from the ongoing and often violent strikes at mines in South Africa. Today, AngloGold Ashanti (AU), the country's third largest producer, threatened to close mines if the men did not go back to work soon. Good luck negotiating with a group torn by millennium-old tribal rivalries. The longer this dispute lingers, the higher the yellow metal climbs. Look to double your position on a dip triggered by news of a labor deal.
This explains why technical analysts are more excited about the gold and silver charts than for any other asset. They interpret the recent sideways move at a peak as a classic sideways consolidation, and one of the most bullish you can find in chart land. They blame this week's lackluster trade on a week-long Chinese holiday that is keeping some of the world's most aggressive buyers out of the market. The breakout could resume as early as next week when they return. Once the train leaves the station, it will be hard to jump on.
Get a few more comments like those from Evans, and the barbarous relic could pop to a new dollar high at $1,922 in a heartbeat. Look for this to happen by year-end, or on the back of the New Year asset allocation surge at the latest. Oh, ahem, did I mention that I have 40% of my model portfolio in gold and silver?