Is the Market Feasting, Digesting or Starving?

April 10, 2016

Mish's Daily

By Mish Schneider

Quantitative Easing: The Fed as Consumer and Producer

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Plant-eating animals are called primary consumers. Animals that eat other animals are called secondary consumers. Both types of consumers need producers. The pathway that food takes through an ecosystem is called a food chain.

Last week, for the first time ever, Yellen, Volcker, Bernanke and Greenspan appeared together to discuss the global markets.

In the pathway of the economic food chain, Bernanke and Yellen concurred that the Fed cannot act alone as the primary consumer and artificial producer of economic stimulus. They called for the Congress to help promote growth and ramp up spending.

At the bottom of the food chain, the Fab 4 acknowledged, is the global economy. Weakness abroad has kept our true producers from amply feeding the consumers. Hence, QE.

Somewhere in the food chain lives my Modern Family. Those 6 members (IWM, XRT, KRE, IBB, SMH, IYT) perfectly represent the tangled web Quantitative Easing as an artificial food source has created.

The meeting last week also highlighted one other concern besides Congress’s inability to do its part to promote growth and increase spending.

Companies need to invest more. Greenspan in particular, mentioned that many big businesses have been holding on to large cash reserves.

So we have a gridlocked Congress unwilling to provide fiscal stimulus. We have big businesses reluctant to invest cash because of a stagnant global economy. That leaves the Fed as both consumer and producer.

If big businesses, the Congress and the Fed all impact our natural food chain, can our Modern Family be well fed?

Feast or Famine comes to mind. Semiconductors (SMH) and Transportation (IYT) feasted in March. Currently both are digesting. Semi’s metabolism works slower than her brother Trannie’s. For now, she is living off of her own body fat. Trannies need another meal soon.

Granny Retail (XRT) feasted for a while and now looks a bit starved. Biotechnology (IBB) managed to survive a famine. Currently sated, IBB is out hunting for his next meal.

The Russell 2000 (IWM) thus far survives on scraps. As Granddad, he eats less than he used to. Nonetheless, if his kids starve, he starves.

Regional Banks (KRE)s suffer from malnutrition. As the best reflection of uncertain monetary policy, an ineffectual Congress and uneasy big businesses, Regional Banks are like shrimp--closest to the bottom of the food chain.

Where does that leave us investors and traders? As Plankton?

Fret not. The food chain is a chain. That means as plankton, we are the grass of the sea. We absorb sunlight and nutrients to photosynthesize. We are the real producers of food. We provide liquidity. We feed other organisms. The Fed is serving QE food to help keep the engine running.

If their plan works, the global economy will grow fatter. If not, many secondary consumers might find themselves vegetarians.

S&P 500 (SPY) 201.50 is where the 200 DMA lives. 204 pivotal 207.14 point to clear

Russell 2000 (IWM) 110-108 trading range to break either way

Dow (DIA) Has support all the way down to 170

Nasdaq (QQQ) 108 support and 110 pivotal

Volatility Index (VIX) Inside day

XLF (Financials) 21.70 the 50 DMA

KRE (Regional Banks) 36.50 support pivotal with 35.90 next support

SMH (Semiconductors) Sideways which typically is better for continuation of the current trend when breaks out of consolidation

IYT (Transportation) Now it has to regain the 200 DMA at 140.15

IBB (Biotechnology) I’m thinking this held up ok.

XRT (Retail) 43.30 the 50 DMA support