Daily update 9/18

Surprise.  At least based on the polls conducted on whether the FED would taper or not.  In Daily update 9/10 I wrote "I suspect the market priced in over the last two days no taper at the Sept. FED meeting and no military action in Syria."  It looks like the market was right on both accounts.  I am not sure why Bernanke decided to surprise the markets.  The biggest reaction today was in gold and gold stocks.  I find that interesting since gold started its down trend right after QE was announced last Sept.  After a year of QE and more to come are people now going to get worried about inflation?  Check out this chart.

Source

This is a chart the FED uses to gauge people's inflation expectations.  It was already shooting up before the extension of full QE.  If expectations continue to rise then bond prices are probably headed lower even though they rallied today.  I think it is likely to take a few days for the markets to figure out exactly how they feel about this.   Traders will now be pondering if taper will be coming at the next meeting. 

Here is the daily SPX chart.

Funny how SPX stopped right at the lower blue channel line.  I don't know if that line is still important or just coincidence.  SPX has a blue bar so it is above the upper Bollinger band again.  This is the case on all lower time frames as well.  Price is very extended to say the least.  The McClellan oscillator is at the highest level since 7/3/12.  Most of the time the market will struggle on the upside from a high reading like this.  It often goes sideways or pulls back some. 

I have no idea what happens now.  Obviously the market is very over bought.  Will people chase the market higher or not.  This is a very high risk place to put on new long exposure.  Will this break out to new highs stick or fail like the one in Aug?  The Aug. high was 1709.  A close back below that would constitute a failed break out and would be likely to bring in some selling pressure.  A pullback that finds support there might be a good buy op.  Here is another look at the VIX chart.

The VIX moved down some with the upside explosion after the announcement.   However, there is still a sizable divergence.  I don't know if it is meaningful or not at this point.

After QE was announced last Sept. and the market spiked up it ended up selling off considerably into Nov.  I don't know if there will be a sell the news reaction or not.  Volume was elevated today so there is the possibility this was a buying climax that could lead to a short term top.  The straight up move since the end of Aug. is one of those moves that is either the launch of another big leg up or was a blow off top.  We will have to wait and see which it is.

Bob