Mr. Sensitive

June 20, 2013

Dear Bulls: I TOLD YOU SO

Filed under: Uncategorized — lbej @ 10:57

Ben Bernanke explicitly addressed the eventual winding down of the Fed’s QE bond-buying program yesterday, and the result was a 200-point drop on the Dow.  This morning we’re down another 225 points.  Bear in mind, Bernanke didn’t say the program was ending now; he talked about potentially scaling back purchases in September if the economy continues to strengthen.  He also made it very clear that short rates will remain at zero for a long time after the non-conventional stimulus measures (bond-buying) are withdrawn.  And still we’re down more than 400 points because the Chairman acknowledged that the Fed can’t prop up asset markets forever.

Have otherwise rational people ever been more panicked about something so inevitable?

I told you so, bulls.  Anyone who paid any attention to the market’s jittery behavior during this massive rally could see that the Fed’s QE program was the psychological floor under asset prices.  Now the idea that the floor might one day be taken away–even with the proviso that the economy will have to prove its strength first–slashed 400 points off the Dow in less than a full trading session.

The market will stabilize and it may very well return to rally mode.  But this is a Fed-driven market.  If you’re bullish long-term, you buy portfolio insurance in the form of puts and short futures, and you look for opportunities in the pullback.  If the rally has a legitimate, fundamental foundation, the pullback will present some great buying opportunities.  That’s the only thing that remains for investors to determine.  The Fed’s paramount role in the most recent leg of the post-crisis bull market is now indisputable.

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