Knee-Jerk?

Like I said Tuesday, if you look up the dates of F_O_M_C policy statements, major F_E_D events, and go back to our archives, you will see that every time I warned like this week, "Beware the F_E_D knee-jerk effect", it's always impressive (up or down) and almost always wrong (the initial knee jerk), it can last several hours or several days, but tends to be faded.

Take a look at this event which was more important at the time than today.

The white arrow is September 13th, 2012 when the F_O_M_C announced the LONG awaited QE3. The initial reaction as you can see was a solid move up and a close of +1.52% which was also a new high for the rally that started in March of 2009. I remember so much about this day, the time  that Bernanke was asked a question that was the first hint that the F_E_D was going to start looking for a way out even as they announced a new program, I know that sounds counter-intuitive, but every move they made after that was further and further toward this eventual taper talk, which was unheard of before Sept. 13th,, all we heard before then was how the F_E_D stood ready to do more with more tools they haven't deployed yet, never a hint of anything that would suggest they were even contemplating, contemplating an exit strategy.

The next day the market started off on a good note, made a new intraday high that it couldn't hold and closed off the highs, but still at a new closing high for the move that started Q1 of 2009.

I remember how many emails I got from members that we needed to close the short positions that were open, how many emails that said, "Don't fight the F_E_D". I remember writing, "My emotions tell me to close all shorts, go fully long and be done with it", but the charts said something different and what I said was, "We need more data, I'm not going to make an emotional decision even though I felt deeply emotional about the issue. The 3C signal was right, for the next several weeks we had more and more confirmation, then the market, instead of blasting off to the upside had topped on September 14th and then the market drifted lower until mid-November, losing about 8%. The September 14th highs weren't seen again until mid January of 2013, the point is not so much about the knee jerk effect here that was wrong and faded as it often is, the point here isn't even about the 3C signals that were negative on September 13th in strong timeframes, the point here was to be patient, to collect objective data from which to make a decision, not arbitrary emotional decisions. Those two days were hard to hold my ground, a lot of members were very scared, but again, we can't get caught getting lost in the lines and missing the bigger picture, even when you might just have to ignore all conventional wisdom and the most widely held market wisdom, "Don't fight the F_E_D"

Don't get me wrong, I'm not making a case here for or against, I know we have some really ugly divergences and I know the market seems to love the decision, but it was that way on September 13th and part of 14th of 2012. The question I asked in my video commentary was, "What is the F_E_D really afraid of?" because we know that their trillions of dollars of policy accommodation hasn't returned the US economy back to a strong, stable economy, the F_E_D's mandate of maximum employment has been a sham, the country would have been better off if they had simply given a quarter of what they spent to all the unemployed or in low interest loans to small businesses, QE has been a failure and they know it. If they were right about their projections and Quantitative Easing's effectiveness, why did we need anything more than QE1?

In Congressional testimony, it seems Bernie's only way of justifying the effectiveness of QE is, "The Wealth Effect" of higher stock prices (and he uses the Russell 2000 as the benchmark-just so you know what index the big boys pay attention to as a benchmark", yet the differential between employment rates of the richest 1% and the poorest is the widest ever on record. The gap between the richest 1% and the other 99% in 2012 was the widest it has been since the 1920's. The top 1%'s income rose +20% while the rest saw a 1% rise.

QE is a failure for the stated reasons of its use, it's a great bubble blower in the market, it's taking up the slack for the Treasury in selling Treasuries when foreign countries have scaled down their purchases, it has given the primary dealers a near free lunch.

So given the fact we know this just as everyone including the F_E_D know this (and the F_E_D is not a FEDERAL Entity, it's a private CORPORATION with some quasi-governmental links, it's really not that different than Bank of America being given the exclusive rights to set monetary policy and print money, don't let the name "F_E_D" fool you, it's suppose to.


So my question is, knowing the above, what in the heck is the F_E_D so worried about? Is it the budget/Debt Ceiling debate or something bigger? There are a lot of questions that could be asked, like could the fragility of liquidity in the market and the CBOE , BATS and NASDAQ breaking down nearly every week now have something to do with what is bothering them because when the liquidity providers, HFTs step back, there won't be the liquidity there use to be, they provide it now, but they are not obligated by law like a market maker or a specialist is to be the buyer/seller of last resort if an order is placed at market. This of course is just theoretical, but there are many questions, they all come back to "What is the F_E_D really afraid of and does the market catch on?"

As far as futures tonight, ES, NQ and TF are still making deeper negative divergences so far overnight. Treasuries that popped are making negative divergences overnight. The currencies that gained like the AUD and Euro are making overnight negative divergences and the $USD that fell like a rock is making a stronger and stronger positive divergence. Maybe I was 100% correct in closing GDX and Gold calls as both gold and silver that popped to the upside are making deep negative divergences overnight.

The Nikkei 225 is making continued negative divergences overnight.

Again, while I'd say the majority of the time there's an initial knee-jerk reaction and it is more often than not wrong, I'm still 100% committed to finding objective data and basing decisions off that data so I'm not going to say today was a knee jerk move that will reverse soon, I am saying the underlying trade thus far in the lighter volume overnight session is leaning much more negative than you'd think and all the way around through numerous assets that moved higher with positives in those that moved lower.

Initial data since 3 p.m. and right up to 12:!5 a.m. has been negative and growing worse and worse as more time goes by.

Regular hours data is the best and I look forward to collecting it, I really look forward to seeing positions work and new opportunities arise, that could start tomorrow morning, it may turn in to something different, but I'm committed to finding the most objective data and the highest probabilities for you.