The Federal Reserve announced today (Wednesday) that it would start to reduce its economic stimulus bond-buying program (QE) from 85 billion a month to 75 billion a month starting in January. Outgoing Fed Chairman Ben Bernanke also stated in a press conference following the Fed announcement that if the economy improves at the pace the Fed expects, he could foresee QE coming to an end by late next year. So it looks like tapering is now officially here and QE is going to be taken away in small increments to avoid severe reactions in the markets. The Fed's announcement was a surprise to many investors who were expecting a postponement of tapering into March, but the markets seemed unperturbed by an early "mini" taper as the DOW soared up nearly 300 points. It is possible that big taper fears were already factored into the market with last week's steep drop and the "mini" taper was a relief, but today's strong rally more likely came from the Fed making it clear that, despite the taper, short-term interest rates could be kept near zero, perhaps for several more years. The specter of rising interest rates has been a major investor fear associated with tapering, so this suggestion of holding the rates low most likely excited investors into buying.
Despite today's surge in the broad stock market, technical analysis and several cycle and timing factors indicate the potential for high volatility in all major markets from now through the first week of January, and we don't want to place too much importance on a single day's rally. If the DOW continues to rally into the end of the week, it could be setting up for a major downturn. A strong bearish momentum signal appeared in the NASDAQ chart today (similar bearish signals appeared in the DOW and S&P 500 last week) so all three major stock indices are now mixed bullish and bearish. Still on the sidelines of this market.
Precious metals moved down a bit today. Tapering is generally considered unfavorable to gold and silver prices so today's announcement of early tapering could start pushing the metals lower into a good spot to cover our short positions and go long. I am going to wait and see how prices move into the end of this week. Still holding short positions in gold and silver.
Crude oil moved with the broad stock market today (i.e. rallied) as expected. If prices continue to rally strongly into Friday, we may see a good setup for a short sell in crude. On the sidelines of this market.