Technically Speaking: Extreme Deviations & Eventual Outcomes

The good news is that with the market closed yesterday, the extreme extensions of the market did not get any more extreme. Also, it doesn’t change our analysis much from this past weekend’s missive either:

“This week, the market pushed those deviations even further as the S&P 500 has now pushed into 3-standard deviation territory above the 200-WEEK moving average.”

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“There have only been a few points over the last 25-years where such deviations from the long-term mean were prevalent. In every case, the extensions were met by a decline, sometimes mild, sometimes much more extreme.”

As we discussed, there is a potential the current “momentum” push, due to the Fed’s ongoing “NotQE,” which could drive markets higher in the short-term.

“With the Federal Reserve’s ongoing ‘Not QE,’  it is entirely possible the markets could continue their upward momentum towards S&P 3500, and Dow 30,000. Clearly, the ‘cat is out of the bag’ if CNBC even realizes it’s the Fed:

‘On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.’

‘The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.’”

There is much debate between the Fed, and their supporters, and virtually everyone else, about the implications of the Fed’s actions. The “Heisenberg Report” did a good job summing up our view on the issue:

“Neel Kashkari’s take is a bit different, as is Mary Daly’s. The whole ‘debate’ is somewhat silly. Both sides are being disingenuous. It’s not ‘QE.’ It probably will be, eventually, but for right now, the Fed isn’t buying coupons. And irrespective of any knock-on effects for risk assets, the overarching intent is to avoid another short-term funding squeeze by reestablishing an abundant reserves regime with a buffer. That, as opposed to a goal of compressing risk premia, driving investors out the risk curve and down the quality ladder to foster the wealth effect.

On the other hand, the idea that the distinction matters is a bit dubious. Regardless of what the overarching goal is, liquidity provision is liquidity provision and there’s a signaling effect too. Call it a ‘chart crime’ if you like, but I’d be more inclined to say that ‘it is what it is'”

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