Fed Concerns and Market Melt Up

The last two weeks we have pointed to the preponderance of Federal Reserve officials out and about warning about complacency from investors and the lack of volatility in the marketplace. Even bankers from Goldman Sachs, Citigroup and JPMorgan have complained that the lack of volatility is hurting their business. Jon Hilsenrath is considered to be a mouthpiece for the Federal Reserve and is charged with helping get the committees thoughts and perceptions into the mainstream. Here is what Hilsenrath had to say in a piece this week in the Wall Street Journal.

Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about.

Other measures of risk aversion and market volatility show an especially striking sense of investor calm. The VIX, which tracks expected stock-market fluctuations based on options trading, has gone 74 straight weeks below its long-run average—a run of steadiness not seen since 2006 and 2007.

Moreover, the extra return that bond investors demand on investment-grade corporate debt over low-risk Treasury bonds, at one percentage point, hasn’t been this low since July 2007. The lower this “spread,” the less risk-averse are bond investors.

The worry at the Fed is that when investors become unafraid of risk, they start taking more of it, which could lead to trouble down the road.

 This indicates a great deal of complacency, Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview. When you get complacency you’re bound to be surprised at some point.

Fed Officials Growing Wary of Market Complacency WSJ 6/3/14 Hilsenrath


Louise Yamada is the Queen of Technical Analysis on Wall Street. She had some thoughts this week on the overall market and gold. We put more stock into her thoughts on gold as gold cannot really be analyzed based on its fundamentals. It has none. Gold is usually traded based on its technical’s. Here is what she had to say on CNBC.

Judging by the market’s short-term trading pattern alone, famous technical analyst Louise Yamada says that the S&P 500 is on its way up to 2,000. Meanwhile, she sees the Dow Jones Industrial Average heading to 17,200.

With the breakouts that are in place for these indices, I think you could move a little higher, Yamada said on Tuesday’s “Futures Now. You may not see something more contractual until into the fall.

In the three-month chart of the S&P, Yamada observes a “continuation” pattern that indicated the S&P’s upward momentum will continue.

The one concern on Yamada’s horizon is the underperformance of the Nasdaq Composite and the Russell 2000.

There’s a little bit of a glitch in the sense that you have a dichotomy in the market. The Russell 2000 and the Nasdaq look a little bit more precarious…When you start to see part of the markets separate from the leaders that generally means that under the surface you’re seeing some deterioration. But that’s not to say that you can’t get some improvement here.  CNBC 6/3/14

Gold’s outlook is not nearly as bright according to Yamada.

Unfortunately, at this time, All the momentum indicators — daily, weekly and monthly, which is the most structural — are looking very negative.

What makes this so troubling is that gold is getting close to a critical level.

Eyeing gold’s trading range between about $1,400 and $1,200, Yamada says that if $1,200 can’t hold, we might flip even to $1,100, and that would actually break the 2005 trend for gold.

Treasuries and Gold continue to be our risk temperature gauge. Watch the yield on the 10 Year US Treasury and keep an eye on gold. We could be in for an equity melt up here as investors are caught with too much cash. While the FOMC continues to play the music investors are forced to dance.

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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