Time to Fight the Fed and Sell Before an Autumn Chill Hits Stocks
Stocks have soared in the last couple of days, nearly reaching a peak in the recovery that began in March. The fresh buying seemed to be in anticipation of, and response to, the Federal Reserve's decision to leave interest rates where they were and its statement indicating that economic conditions are bad but less so than a few months ago.
Traders apparently took heart in the announcement that the Fed plans to wrap up its program of debt purchases to stimulate the economy by October, a sign that it thinks the recession is abating. But the central bank's message may provide a good excuse to sell, not buy, and it may be just one of several reasons to get out of stocks.
Developments in coming weeks may persuade the Fed that the economy is still too fragile to be weaned off its balance sheet. That could send the market into a tailspin.
Share prices may not have much scope to do better even if the Fed is able to follow through on its plan. With the stimulus program no longer there to serve as a backstop, any piece of negative data is likely to receive harsher treatment in the market.
Investors may conclude, with good reason, that with interest rates at zilch and the debt purchases over and done with, the monster remains unvanquished and there are few arrows left in the Fed's quiver to finish it off.
Graham Summers, commenting on the Seeking Alpha website, suggests another cause for circumspection about the rally: It looks like déjà vu all over again. He highlighted several events last year that seem to be making a repeat appearance.
Commodity prices hit bottom early in both years, then rescue/stimulus operations - Bear Stearns last year, everything including the kitchen sink under President Obama this year - propped up stocks in the spring and early summer. More ominous is the steep fall in the Baltic Dry Index.
The what? The Baltic Dry Index is a measure of prices paid to ship bulk cargo. As uber-wonky as it may seem, the index is seen as the economic equivalent of a canary in a coalmine. When global shipping prices fall, the economy tends to follow.
The index began to plunge in late May last year, and the rest, as they say, is history. As this chart from Bloomberg News shows, it topped out this year in early June and has fallen nearly 40 percent with little fanfare or alarm.
Summers predicts a "nasty autumn." That would be two in a row - the meatiest part of the recent bear market stretched from last September into November. But while he makes a good case for being cautious by citing parallels with 2008, the truth is it's always prudent to be wary at this time of year.
The stock market often peaks during the summer, declines into October and then takes off again. This year shows no sign of being an exception.
Stocks have risen 50 percent in five months, a move that was probably justified by the months of panic selling that preceded it. But it has not made much net progress since May, and there's no panic anymore - anything but.
A report by Jeffrey Palma, a strategist at UBS, shows that risk appetite has swung from the lowest point in its 16-year history in March - well below what it was during the Asia crisis of 1998 or just after Sept. 11, 2001 - to nearly its highest point since the technology bubble was inflating.
History may not continue to repeat, but with momentum flagging, expectations suddenly so much higher and stocks well into one of their most breathtaking rallies ever, this seems like an odd and unwise time to bet against it. Wait a couple of months; chances are you'll find the weather colder, the mood darker and share prices lower and due for another rebound.
