I think Federal Reserve Chairman Ben Bernanke’s recent announcements got him his desired effect. Let me explain why.
The housing market was sizzling with bubble-like characteristics, and the stock market was in overdrive with the S&P 500 and Dow tacking on record after record.
Everybody from the retail investor to the Federal Reserve members to the pundits were attributing the gains to the easy monetary policy aggressively being pushed by the Federal Reserve.
Well, Bernanke did the right thing, and while things are not exactly calm at this moment, prices in the stock and housing markets have adjusted downward to more manageable levels.
On the charts, the major indices are all below their respective 50-day moving averages (MAs) and showing weak relative strength. As well, the S&P 500 has corrected 6.77% from its May high.
But I’m not convinced the worst is over yet. In my view, the potential of more downside moves is real and could likely surface. This would provide a buying opportunity to look at adding stocks.
The problem is that there’s still not a solid sense of which way things will go—much will depend on the economy and the Federal Reserve.
We saw some buying emerge in late-day trading this past Monday continuing into Tuesday morning. That buying suggests there could be some support, but I’m not convinced.
Stocks could rally like they did in mid-April, after a minor correction, but the selling could continue, following a pause. Traders will be eyeing the slew of key economic data on the horizon and trying to figure out whether the tapering of the bond buying will begin later this year, as the Federal Reserve suggested.
But as I mentioned in my recent post–Federal Reserve commentary, as long as interest rates remain low, I still feel stocks could go higher, though not at the same rate we have seen.
The reality is that the economic renewal is continuing, albeit not at a pace that some would probably want to see; nonetheless, the low interest rates will allow the economy to move along, which is what the Federal Reserve is looking for.
The key durable orders reading increased 3.6% in May, which was unchanged from April, but was below the more optimistic 4.5% estimate from Briefing.com. On an ex-trans basis, durable orders jumped 0.7%, better than the Briefing.com estimate of a reduction of 0.6%, but short of the 1.7% in April. The positive sign here is that consumers are continuing to spend.
Another hot topic is the housing market.
The Case-Shiller 20-City Index continues to point to strength, with home prices surging 12.1% in April, representing the biggest gain since March 2006.
The SPDR S&P Homebuilders ETF (NYSEArca/XHB) has lost 14% since its May peak and is still looking for a bottom, as shown on the chart featured below. Failure to hold at 28, as indicated by the horizontal blue line, could drive the housing stocks lower. In my view, the housing market has had its run and the easy money has been made. I would be hesitant to enter the housing market at this point.
Chart courtesy of www.StockCharts.com
I also would not be buying in this current housing market; however, I would be looking for any further declines.
For now, it’s all about the economy, jobs, and when the Federal Reserve will begin to reduce its bond buying. Depending on how the economic readings turn out, there will be more debate on the Federal Reserve’s bond buying—which means market volatility and possible opportunities to make money.
This article Is It About Time You Take Advantage of the Market’s Near-Term Volatility? originally published at Investment Contrarians by George Leong