The last couple of mornings on CNBC have featured various Fed Board members as “guest hosts” on Squawk Box. I don’t recall the name of the particular Fed person who hosted earlier this week but I do recall something he said. What he said was (paraphrasing) that he (truly) believes that higher stock prices trickle down to the general economy. The implication being that the Fed has been and will continue to do what they can to ensure higher stocks. I have never seen any empirical data to back the claim that higher stocks cause and are not just correlated to higher gdp and have my doubts as to its veracity so if somebody reading this post has, please share.
Since watching that sordid episode, I’ve been mulling over why the Fed seems so terrified of letting the indexes pull back from here. Ie, why have we gotten a correction through time and not price? Looking at the moving averages for the major indexes it is apparent that a normal, ie average, pullback (10% to 12%, depending on the index) begets 2 things; the first is a death cross of the 50dma and the 200dma and the second is a declining 50dma.
Now, our Chairman of the Board and Editor-In-Chief is very vocal in pooh-poohing technical analysis. But there are enough people out there who will pay attention to a death cross and/or a declining 50dma and will let it bias their position. Even our esteemed Co-Director ChessnWine has gone on record saying he pays attention to the slope of the 200dma when determining whether he is inclined to be long or short. The point being that deteriorating technicals can become a self-fulfilling prophecy. And there is the risk the accompanying selling pressure creates a vicious cycle lower.
One Response to Why is The Fed So Afraid of a Normal Pullback From Here?
The same reason publicly traded companies want to beat expectations every quarter.