"One might as well try to perform brain surgery with a sledgehammer" -- Ben Bernanke
Four years ago the market blasted higher as the Fed rolled out its bold and innovative quantitative easing program. It worked well as far as driving the stock market higher, but as far as its intended goal of helping the economy and creating new jobs it has very mixed success. In fact, the question many are asking this morning is if quantitative easing works so well, why do we still need even more of it at this stage?
The economists can debate the economic merit of the Fed action. The question we need to focus on is whether the Fed is going to be the potent driving force for the stock market that it has been in the past. In the past, this flood of cheap money that the Fed created had few places to go, but into commodities and the stock market. As long as the Fed was running its printing press there was strong underlying support for the stock market and we would continue to trend steadily higher.
That is still true to some extent, but we are now so awash in cheap capital that creating even more of it has little impact. There just isn't much potency to making more funds available when there isn't much demand for what already exists.
We saw after the announcement of Operation Twist how the market is no longer gunning higher on more liquidity. Yesterday we didn't even wait for Ben Bernanke to finish his remarks before the market has reversed and given back all of its post-Fed gains and more.
It is clear that the Fed just isn't going to matter to the degree it did a couple years ago and we can't count on its endless liquidity to cushion this market in the same fashion. It is still true that we don't want to fight the Fed too much when it is making moves, but the momentum it tended to create looks like a thing of the past.
Unfortunately, with the Fed not being much of a force in the market means we will quickly shift our focus back to the fiscal cliff debate. That remains the key issue in the market and until it is resolved we are wasting our time even thinking about anything else.
The market action indicates that investors are very optimistic that a deal will be made. We have been trending up for weeks and we have been shrugging off negative comments from the politicians pretty quickly.
Although we have had generally positive action it has been very slow and choppy. It hasn't been a rally driven by big momentum and aggressive buying. It has often looked like buyers are inching in because they fear being left behind and want to make sure they have some exposure in case a deal is suddenly made.
It is unlikely that we will see a deal before the Christmas holiday, but the risk of positive developments is high enough to make shorting very tricky. You might catch an intraday move like yesterday, but holding shorts for longer than a few days will be hard especially as we move closer to the fiscal cliff deadline. I have little interest in trying to play the downside until there is something clear to indicate that the deadline won't be met.
Although I don't have much interest in the short side, it isn't at all easy to put money to work in this market right now. We aren't seeing many themes or pockets of momentum and the small handful of movers is very choppy. I'm going to keep digging for buys, but I don't expect that I'll be able to put much cash to work in the near term.
We have a very flat open once again and not much movement in individual stocks. Maybe a good bout of selling at this point would be the sort of shakeup we need for some better trading.