Is This Just another Central Bank Rescue?

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Surprise! The market actually saw some green screens this week, a welcome relief from the virtual sea of red through the first dozen or so trading days of the year. And while stocks plunged into official correction territory last week (10% or more off the most recent high), this week’s rebound was both welcome and overdue.

So, what prompted buyers to step back into the market in the past couple of trading sessions?

One reason is Friday’s rebound in crude oil of more than 7% midway through the session. Oil’s precipitous plunge of late really has put pressure on energy stocks, bank stocks and many other large-cap stocks — stocks that all are components of the major market indices such as the benchmark S&P 500.

In the chart below, we can see the price of the S&P 500 plotted along with the price of crude oil.

spxspx

The relationship here isn’t hard to see, even for the most novice chart reader.

As oil goes, so go the prices of U.S. large-cap equities. That means that if oil prices can stabilize here, that will go a long way toward stopping the wider market bleeding.

Another bullish factor helping stocks climb is renewed chatter of more stimulus from central banks around the world.

While the Federal Reserve isn’t likely to do any kind of renewed stimulus, I do expect Janet Yellen and her fellow U.S. central bank leaders to be more “dovish” in their language at next week’s Federal Open Market Committee (FOMC) meeting. There’s also a good chance the Fed will hike rates only one or two more times at most this year. That’s a far cry from the four rate hikes the Fed had signaled it would undertake last December.

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Also, rumblings out of both the Bank of Japan (BoJ) and the European Central Bank (ECB) suggesting there could be more quantitative easing (QE) in the months to come has helped buoy rallies in those respective markets as well as here at home.

This week, ECB President Mario Draghi announced he expects the ECB to move on more QE as soon as March. That news helped lift U.S. stocks yesterday, and it’s helping the overall bullish environment today.

So, will this be another case of central banks to the rescue?

Possibly, but given the big selling we’ve seen in 2016, there’s still a long way to go before the major global markets can get some traction.

The table below shows just how beaten-down markets have been year to date.

beaten down markets

Finally, I am of the opinion that if we continue to see a bounce in the broad markets, that will be a chance for most investors to sell into strength and reduce equity exposure (if you haven’t done so already). And until this market can break back above key technical resistance levels, the bears will remain in control.

If you’re a subscriber to my newsletter, you’ve already been mostly out of stocks since before the biggest selling took place. If you want to put a proven investing plan in place that tells you when it’s safe to buy, and when you need to sell, then check out Successful ETF Investing today.

 

Searching is Half the Fun

“Searching is half the fun: life is much more manageable when thought of as a scavenger hunt as opposed to a surprise party.”

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— Jimmy Buffett

I love Jimmy Buffett, and not just for his excellent music. The iconic performer is a huge business success, and he’s someone who you can tell just loves life. Here, he tells us about the virtue of the search, and why that’s a really big part of enjoying the time we have.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about how to deal with the market’s turmoil. I also invite you to comment in the space provided below my commentary.

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