The U.S. Federal Reserve is scheduled to make an important announcement tomorrow (Wednesday) regarding possible changes to their current Quantitative Easing (QE) policy, which has been in place for some time now. The big concern for Wall Street is whether or not the Fed will start to cut back (taper) QE and, if so, by how much. We know from the recent past that the broad stock market is terrified of even the mention of any QE tapering, so why has the market been rallying so strongly this week? The answer seems to be Sunday's withdrawal of Lawrence Summers as a candidate to replace exiting Ben Bernanke as Federal Reserve chairman and the likely consideration of Janet Yellen for the position. Mr. Summers was thought by many investors to be less committed to The Fed's current open-ended QE policy than Mrs Yellen, and Wall Street seems to be cheering this news. The announcement of Ben Bernanke's successor will not likely be made this week, but the Fed's statement on QE policy will be made tomorrow and it could have a strong impact on all the financial markets.
The broad stock market has been very bullish over the last two weeks and upward momentum is very strong at the moment in the DOW, S&P 500 and NASDAQ. Nevertheless, all three indices are now approaching and testing fairly strong resistance zones, the market is overbought, and several analysts that I follow seem to feel a downturn is imminent. If the Fed announces tomorrow any plans to begin QE tapering, this could easily kick the broad stock market into a downtrend. We will continue to stay on the sidelines of this market and see how this plays out.
As I discussed in my last blog, gold and silver appear to making a significant bottom right now that we are looking to buy. In terms of timing, we are now at an ideal entry point (through the end of this week), but tomorrow's Fed announcement is making me cautious about jumping in too soon. While the announcement could have the effect of turning the market up, it could also push prices down strongly to a deeper bottom. Short-term and medium-term momentum is also still bearish in both gold and silver, and I would like to see at least a change in short-term momentum before going long. We may get this before the week is over, so we are still on the alert to buy. Staying on the sidelines today and waiting for the Fed's announcement on Wednesday.
Because the Syrian situation is not yet fully resolved and President Obama and John Kerry continue to make it clear that U.S. military strikes are still possible, the price of crude oil continues to be potentially very volatile. I am therefore going to avoid trading it for the time being. Crude's price has been coming down over the last two weeks and is now approaching a strong support level at $104. The cycle picture for this market is still not clear and technical signals are a bit mixed at the moment, so even without the Syrian crisis we would still be on the sidelines for trading. If the Fed's announcement favors the stock market (i.e. maintains QE) then it is possible oil could find support near $104 and begin to rally strongly again. Current momentum, which is still very bullish, supports this argument. Should this scenario play out and the U.S. war drums begin beating again, I will consider going long in crude; but for now I am remaining on the sidelines.