A quick point worth noting from this morning’s gross domestic product report. The report is largely a yawn, containing few interesting revisions to earlier estimates of economic progress in the second quarter. But there’s one number that caught my attention. The Bureau of Economic Analysis has revised its estimates for the personal consumption expenditures price index. It’s an important number, because this is the index the Federal Reserve targets. And remember, it’s aiming for inflation of 2 percent.

I won’t overstate this. It’s just one quarter, and it’s evident in just one index, and even when I cherry-pick this interesting number, prices aren’t really falling very quickly. The PCE deflator fell at an annual rate of only 0.1 percent in the second quarter.

TLT will most likely suffer from taper speculation and go sideways bouncing $1-$3 and possibly down.  A ccpi and gcpi of 2.0 will be necessary to get at least a $8 run or more.  I see this as most likely May of next year as inflation is still weak.

SPY is still the only bull market in town and will remain so until taper day Apr 25.  As the BBd is wide for SPY at this point, it usually goes sideways (Oct) and falls (Nov).  I have reconsidered and see the next buying opportunity in November as SPY may fall after debt resolution and get close to the 200dma at some time in November (161).  This will be the buying opportunity as it will rally $7-10 until the Fed meeting Dec. 18.  Sell day would be Dec 18 or 19 whichever in the ‘up’ day. When SPY hits the 200dma, the best run is 1 mo or 30 days later.

In addition to the BBd on SPY, the daily OEX or OEXd can be used to time the rebounds and buy point.  SPY may bounce on the BBd 3-4 times before a bottom in November.

http://stockcharts.com/h-sc/ui?s=$OEXA200R&p=D&yr=1&mn=0&dy=0&id=p56008386277

For a sufficient inflation surge, gas buddy should drop to $3.20 and rise to $3.60 or $0.40 in order to push inflation into the Fed taper zone. For now gas buddy keeps dropping as economy is weak. Don’t expect a taper until next year as the Fed considers inflation and growth too low. If gas buddy keeps falling the next 2 months, the ‘spring’ should be coiled for next year.

However, a SPY bounce strategy can work until then. SPY bottoms out 5-8 days after Fed minutes are announced: Feb 25 (20), Apr 18 (10), and Aug 27 (21). The market runs up from just after the minutes to the Fed meeting. Since June, taper worries cause the market to fall after every meeting.

On Oct 9, the Fed minutes are announced.  Between Oct 14-17, SPY bottoms out. It will fall below the daily Bollinger Band and re-enter the Bollinger Band around 165-166. As the debt limit is resolved and the Fed meeting on Oct 30 takes place, SPY rises. The best time to sell will be Oct 30 or 31 whichever is the ‘up’ day.

November should see another stock swoon as 2009-2012 shows. End of November (Nov 26-29) will be another opportunity to buy SPY again selling on the Fed Mtg Dec 18/19. Jan may provide another swoon again until the gas buddy ‘surge’ is seen like Feb of this year. An inflation surge is not good for SPY.  Feb of this year saw a flat return for SPY.

Taper worries continue as you can see below. This works well with the above strategy.  I say no taper until March or May meeting next year!

Possibility of taper in October: senior Fed official
MENAFN – AFP – 20/09/2013

(MENAFN – AFP) A senior Federal Reserve official said Friday that there is a possibility of cutting the Fed’s stimulus in October, if economic data improves significantly.

Speaking two days after the Federal Open Market Committee shocked expectant markets by not reducing its 85 billion a month stimulus, FOMC member James Bullard said the beginning of the “taper” could still come this year.

Sell 1/2 of tlt…rest tomorrow.  Low inflation 1.76 ccpi and especially weak gcpi 1.5 means

weak economy = stimulus until 2.0 reached

It’s as simple as that. In March 2013, 2.0 was achieved, 3X occurred and the Fed day was perfect to buy TLT on that day.  This situation is going to take 3-5 months before we see it again. Taper talk is all smoke they may even add to QE if inflation doesn’t rise to their target.

I estimate the earliest ccpi to be 2.0 in November but could be December/January. Taper would be December 18 meeting  at the earliest but most likely January/March.

Of the 3X, only one TLT:SPY had occurred in late August. Both TLT and TLT:$WTIC were missing  so that’s a bad sign. In addition, ccpi was too low at 1.70.

As in March 2013, wait for taper to buy in either 2 situations :

1st) 3 X:  TLT 10wkma X, TLT:SPY X and TLT:$WTIC X

2nd) Buy on taper day

OR

1st) Taper occurs most likely Dec 18 / end of Jan.  Then wait until

2nd) Buy after the 3 X:  TLT 10wkma X, TLT:SPY X and TLT:$WTIC X

The Fed has been blowing bubbles since 1987 and clearly doesn’t care about bubbles.  Given the highest leverage ever used in this market, taper will create mayhem when it occurs.  Fed policies are clearly ineffective as economic growth targets have been ratcheted down again to 2.1.

Good article from Ambrose:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10319186/Fed-recoils-from-1937-tightening-error-as-jobs-evaporate.html

Oil and stocks are at a high and the taper is coming. Best time to buy bonds is when stocks are at a high, oil is at a high and Fed is reducing stimulus.   There’s no better time.

Notice how bond prices rose in the last week. Why?

1) Those who were going to sell have sold already

2) Less stimulus means falling inflation and is good for bonds/bad for gold

3) Fed actually wants falling interest rates at this point due to diminishing returns on QE

Diminishing QE returns (continued econ weakness) are the issue now rather than the  inflation target of 2%. Taper to be 10B which has currency traders upset as they expected 20B.  Nevertheless, taper in a weak economy is a great situation as the entire economy has become addicted to Q-ternity. As bond prices rise, the Fed will be happy with that and continue taper in Oct/Dec.

As risk assets fall, the USD will start to rise again as well. The last signal to buy more TLT is when it crosses the 10wkma next week.

http://news.yahoo.com/forex-dollar-under-duress-markets-031734731.html

The recent market volatility has been due to Syria.  It’s important to see impact of taper next week and the week after before making decisions.

QE was announced last November and there was a dip in December before SPY took off in January.  Hence, the taper announcement will create a lot of near-term volatility.

However, QE drove stocks up so taper will cause them to revert to the mean.  Rising interest rates are opposite to what the Fed wants and currently they are having an impact on the economy. Hence, the current QE policy needs to change eventually leading to a twist to restore low interest rates.

Oil is now falling and is a primary liquidity indicator.  Oil has been in a uptrend and a big run-up since mid-June.  After every big run-up see oil in Apr 2011 or Mar 2012, the SPY has peaked and TLT has turned.

OEX still below 40wkma showing bear market..

Taper is still on track.  It’s quite simple.  Growth and jobs have slowed despite QE so it’s time to ‘reload the gun’. Taper QE and allow bonds to bounce back as stocks have diminishing returns at the moment and high interest rates have slowed things.

http://www.bloomberg.com/news/2013-07-22/fed-seen-tapering-qe-in-september-by-half-of-economists-surveyed.html

Gas buddy shows liquidity being removed as well….

http://gasbuddy.com/gb_retail_price_chart.aspx?time=3

Stocks have had their turn now bonds have to be given a try…

USD now shows bull trend due to taper. Currency guys see taper coming but stocks are caught on last round of exuberance before party over. OEX may indicate a X on Friday but this will be a whipsaw as the transition to taper will begin this month.  The last change in policy was announced in Dec 2012 and implemented in Jan 2013. This is a big month for a bull/bear transition in stocks.

http://stockcharts.com/h-sc/ui?s=$USD&p=W&yr=3&mn=0&dy=0&id=p76100461158

We know from Aug 21 that the Fed minutes indicated taper on track.  Aug 21-Aug 30 shows that taper is not good for stocks/risk assets and is good for bonds. Stocks are always the last to realize waiting until the last minute.

http://www.streettalklive.com/newsletter.html?download=299:special-report-confirmed-sell-signal-is-issued

Lance Roberts sees SPY in 145-150 range by early Nov-late Dec.

Now that TLT is bought…hold positions.  The OEX will tell when to exit and sell.

http://stockcharts.com/h-sc/ui?s=$OEXA200R&p=W&yr=3&mn=0&dy=0&id=p98821371788

When OEX X on the upside either the 10 wkma or the 40 wkma, it’s a good time to sell.  Target dates are end of September to mid-October.  One other check is the ccpi still rising on Sep 17.

It’s the reverse of last year in November.  The economy stalled last November when the stocks were low and the bond prices high. Now the bond prices are low and must go up while the stock prices are high and can come down.

See also the SPY trend link showing a smooth curve on stocks. The downtrend actually started mid-June.  It bottoms 60-65 or 25-30 depending on the run before.  This run looks like a 2011 OEX dip level ending with a range of 25-30 and 2-3 more months of down.

http://stockcharts.com/h-sc/ui?s=$OEXA200R&p=W&yr=3&mn=0&dy=0&id=p51905434648

http://www.reuters.com/article/2013/08/26/us-economy-durables-idUSBRE97P0FL20130826

“When looking for signs that interest rate increases are too much for the economy to handle, durable goods, like housing, are a leading indicator of weakness in the broader economy,” said Chris Low, chief economist at FTN Financial in New York.

“We expect the Fed is determined to start reducing the size of asset purchases regardless, in part because the market has already begun to reverse some of the recent rate pressure without the Fed’s help.”

U.S. Treasury debt prices rose on the data, pushing yields lower, while the dollar fell against the yen. U.S. stocks were up marginally.”

In other words, the Fed is caught between a rock and a hard place.  Taper will cause stocks to fall but interest rates to also fall. However, more stimulus is not possible as it will drive interest rates higher and reduce growth further.

The taper must continue regardless of stocks falling (at this point). VIX is also rising. The melt is on!

http://stockcharts.com/h-sc/ui?s=$OEXA200R&p=W&yr=3&mn=0&dy=0&id=p98821371788