Federal Reserve action gave stocks a short-term boost last
week, but without additional news, trading volume is expected to
be low through the holidays.
Traders Cheer the Fed
SPDR S&P 500 (NYSE:
gained 1.94% last week after the Fed gave traders everything they
seemed to want. Asset purchases will continue, but instead of
buying $85 billion worth of bonds every month, the Fed will only
be buying $75 billion a month starting next month.
The general expectation seems to be that there will be a
gradual decrease in the purchase amount announced at future Fed
meetings unless the economy weakens. Even though the amount of
the purchases will be smaller, the Fed should still be adding a
significant amount of money to the economy through this program.
Reducing purchases by $10 billion after every meeting would
result in $460 billion in monetary stimulus to the economy next
The Fed is a bullish factor for the stock market in 2014.
However, earnings and economic growth will probably be the
factors that determine how stocks actually do in the next year.
For now, those factors are bullish and gains for the full year
seem likely unless earnings disappoint or the pace of economic
growth slows unexpectedly. While 2014 is likely to end higher,
traders should expect pullbacks along the way.
It is also important to remember that the long-term trend is
SPY has closed above its 20-month moving average (
) for 27 consecutive months. There is nothing magical about the
20-month MA. It is simply the default time setting for Bollinger
BandsR and is commonly looked at on charts.
Since the S&P 500 began trading in 1928, I found 21
previous times where the index remained above the midpoint of the
Bollinger Bands for two years or more. Assuming you bought at
that point and sold one year later, you would have lost money on
14 (67%) of those trades. All trends, even strong uptrends like
we are enjoying in the stock market right now, eventually
The 20-month MA is about 15% below the closing price of SPY. I
believe that is the downside risk in the current market. We will
not see an immediate drop to the MA, but I am looking for that
level to be reached in the first half of next year.
Gold Faces Year-End Tax Selling Pressure
SPDR Gold Shares (NYSE:
fell 2.88% last week and reached a new 52-week low. The Fed's
decision to taper should decrease the inflationary pressures in
the economy. At the end of last week's meeting, the Fed also
updated its economic forecasts. It expects to see inflation
remain below 2% for at least the next three years. Lower
inflation would be bearish for gold.
At the end of last week, GLD was down 28.44% since the end of
2012. Many gold investors are showing losses on their positions.
At the same time, many will be showing gains on their positions
in the stock market. Some might be tempted to offset the capital
gains in stocks with losses in gold.
We could see more selling in GLD before the end of the year as
traders look for strategies that might reduce their tax bills. If
you are considering a trade for tax purposes, you should consider
consulting with a tax professional.
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