Special Bulletin: August 25, 2021

To Tapper or Not to Tapper, that is the Question:

Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune (cheap money- continued low interest rates), or to take arms against a sea of troubles (out of control inflation). That is the question for the Fed this week.

On Friday, the Federal Reserve Bank of Kansas City will start a modified Economic Policy Symposium called, “Macroeconomic Policy in an Uneven Economy.” The annual event, held in Jackson Hole, Wyoming, is scheduled for August 26th – 28th. 

A chief area of interest, for investors all over the world, will be comments about when the Fed will start withdrawing some of the stimulus it has provided to markets since the panic days of the Chinese Covid-19 pandemic.

So much is at stake. Tapering, when done properly (at least in the eyes of Wall Street), is tricky business at best, and Wall Street has been hanging on every Fed breath for signs about what to expect next.

Fed officials are all too aware that investors have gotten used to the Fed’s monthly injections of fresh capital. As a result, the Fed likely feels enormous pressure to proceed very cautiously, or else run the risk of causing a “taper tantrum” sparked bear market (December 2018 anyone?).

Mohamed El-Erian, chief economic adviser at Allianz, a multinational financial services company headquartered in Munich, Germany, recently shared an interesting analogy of parents that need to stop giving their children sweets.

“Yes, there may be some issues in the beginning. There may be a tantrum. But the response to that is not to continue feeding your kid candy all the time. The response to that is to do the right thing and manage through the tantrum.”

Hmm. Manage through the tantrum, huh? I get the point but dealing with disobedient children doesn’t usually cost me tens of thousands of dollars to resolve, like a sharp market correction could. (On second thought, maybe certain kids’ situations can cost a lot too.)

The market remains at a critical juncture. It needs a positive catalyst to provide an incentive for the next leg up. At present, we are defensively positioned in our strategies with current equity exposure levels around 50%.

Our Current Market Outlook continues at “Uptrend Under Pressure” with a yellow light. Our “Core Four” has improved with 2 green, 1 yellow and 1 red light (see top of page) and reflects a tenuous demand for equities- at the present.

The S&P500 held critical support at its 10-week moving average last week as the “buy the dip” crowd emerged again.

In gauging the markets internals for staying power after the recent trips to price support, we still see waning demand (chronic low trading volume at all-time highs) which is why the Current Market Outlook and our Core Four are in a yellow condition.

However, the CBOE Volatility Index (VIX) is back at a level that accommodates a slightly bullish view.

Something we shared two weeks ago which bears repeating, “Our team, being extraordinarily aware of past market cycles, remains cautious but optimistic. At the same time, we are preparing an exit strategy for each of our strategies in order to protect our clients’ assets from the inevitable emergence of a negative catalyst.”

What can you do now? Be smart, wait for the Fed; higher interest rates may be coming sooner than expected. Invest in stocks/ETFs’ that display significant volume increases on correct breakouts. Keep monitoring the US 10-year note rate as a “taper tantrum” tell. Remain on guard for a vertical violation. 

Have a Triumphant day! ® 

Ps. We have closed our Twitter and Facebook accounts. Read about our decision here and here.