Stock Market Rallies Should Be Sold, Fed Policy Damaging

Stock Market Rallies Should Be Sold, Fed Policy Damaging

$SPY

Stocks rallies should be sold as the US Fed loses credibility on monetary policy and threatens markets, said the chief market strategist at Cantor Fitzgerald.

Last week the FOMC voted to hold its fed funds rate at a record low of Zero+ per cent, where it has been since December 2008 as the global economy shrank the most since the Great Depression. That loose credit policy may lead to greater financial instability, he said Tuesday.

“The Fed is too close the problem to contemplate why monetary policy has lost its impact on the real economy,” he said, “and too close to recognize that the unintended consequences of its policies, like commodity deflation, are greatly overwhelming any benefits to fundamental demand.”

He recommended that investors sell rallies and use put-spread strategies to protect against market dips, especially for the Russell 2000 index of small-cap companies, which was down 2.8% this year to 1,170 as of Monday, 21 September.

The S&P 500 Index (NYSEArca:SPY) of the biggest companies was down about 6.21% to 1,933.70 YTD

“While we are still waiting for more serious cracks in the foundation of the U.S. credit markets before we become more bearish … we’d look to reduce long exposure into an S&P rally (off the recent local low) between 2,000 and 2,050 and a Russell rally into 1,200,” he said. “We greatly prefer the use of Russell put spreads to S&P strategies.”

For longer-term investors, one analyst recommends sitting tight through the market declines because historical data show solid rebounds.

“Inevitability the question comes back to what an investor should do,” he said. “The most wrong answer? Panic and sell indiscriminately.”

The S&P 500 last month corrected after falling 10.8% from this year’s record high. China’s currency devaluation sparked investor fears that the world’s 2nd-biggest economy was in deep trouble, leading to a global sell-off in stocks.

The 17 market declines since Y 2009 took an average of 26 session days to bottom out and an equivalent 26 session days to recover, according to the historical data.

“But, there’s a possibility of a bigger bottom coming,” he said. “On the bright side, in previous cases, the real bottom was not much lower than the initial low.”

Stay tuned…

HeffX-LTN

Paul Ebeling

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