What Latest Fed Intervention Means for the Market

The Fed's announcement last week is very aggressive. With a $40 billion/month open-ended MBS asset purchase program, Bernanke basically said that there is no cap on the amount of mortgage backed securities the Fed will buy. This comes at a time when many economic indicators have been positive (aside from employment) and the stock market is at multi-year highs.

Since there is not a definitive number in the Fed language, there is a certain amount of uncertainty in terms of the amount of stimulus this $40 billion/month represents. But if you listen to what Bernanke did say in his press conference you have to realize that the latest Fed action is extremely aggressive. I will quote Bernanke to emphasize this point.

"We are not going to be premature in removing policy accommodation. Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we're not going to rush to tighten policy, we're going to give it time to make sure the recovery is well established."

-- Ben Bernanke Press Conference, 9/13/2012

So while he/the Fed did not come out and say when these asset purchases would end, it is safe to say they will continue for quite some time.

The market has yet to digest this key point fully, but it will do so over time. What I mean is that the move up over the last two days is only the beginning. Yes, we can have retracements to the downside as the market moves higher, but this market is headed a lot higher.

We must also realize that the Fed will continue to reinvest its existing holdings through the continuation of "Operation Twist" which brings total asset purchases by the Fed to $85 billion/month. And we can't forget that the 0% interest rate policy was extended until at least mid 2015.

In my opinion this is a buy every dip type of market until the fiscal cliff situation comes into play. There will be some up and down action as we approach the November elections and speculation is rampant whether or not the Democrats will maintain office. More confidence that Obama will be re-elected will put some downward pressure on markets, but the path of least resistance will remain to the upside. This will be the case until the Fiscal Cliff situation comes into play following the election. If Obama wins (and this is highly likely), the fear of not resolving the looming tax hike dilemma will be greater and so the downward pressure on the markets will also be greater. There will be a lengthy conflict on whether or not to go through with the scheduled tax hikes as we approach the end of the year. As this Fiscal Cliff debate takes place, the market should finally undergo a correction. So, November will likely be a good opportunity to test the short-side of the market. If the debate over the debt ceiling is anything like the one that took place in the summer of 2011, there will be a healthy move lower in price. Eventually I think Obama will have to delay tax hikes and the debt ceiling will have to be raised to make that possible. Following a would-be sell-off, this will be the time to buy back into the market.

Getting back to the present situation:
Market will likely consolidate and inch higher heading into the first week of October when we get the first Presidential debate between Romney and Obama (10/3/2012) and the next ECB announcement (10/4/2012) and then the US Employment report (10/5/2012).