As expected, the Fed Minutes created a pivot for the market this week. Board members hinted that the QE program could be tapered off or ended before 2013. They also suggested that program purchases could be varied in response to incoming information about the economy. In the midst of this sofar minor correction, it is easy to lose sight of the fact that the market made a new yearly high on Tuesday. On the lows of this week the market had erased a month of gains in a two-day period making a relatively shallow correction feel much more sever. So much so that the group of investors who over the last month have promised they would buy *any* meaningful pullback, suddenly found themselves with cold feet. Shout out to the wall of worry.
The major story this week is the $USD relative strength pre- and post-Fed Minutes. This has far-reaching effects, but does not mean the immediate death of equities. Crude, gold and, other commodities did get smashed relative to equities. I expect it to get worse for precious metals, but equities are in vastly different investment cycle to precious metals, which remain in the dark, cold shadow of a true bubble. This is also a time in which correlations are falling overall (although, they always uptick during a selloff). I not sure the old playbook of precious metals leading the market lower applies. Copper on the other hand, needs to be watched closely. Tune in to $FCX as a proxy, and watch the December lows for a definitive break.
It goes without saying that the Fed was paying attention to the market’s reaction. Did it lessened Bernanke’s resolve or does this give him more of a mandate and room to work? My bet is we hear less about “tapering off” and much more on “until substantial improvement in the labor market” in the next minutes and in Bernanke’s testimony in Congress next week. As a side note, any non-deflationary energy cost reduction is a massive positive for the economy. I’ve always seen this coming as a part of the long-term (5-10 year) shift towards Natural Gas, but if it gets sped along by market feedback to Fed speak, then so be it.
This week money flowed into defensive sectors like utilities, consumer staples and healthcare. The basic materials and energy complex sold-off extremely hard. Consumer discretionary also felt the brunt of the risk-off momentum. Shorts will see this as an opening to press lower, but time will tell if they can be successful. Recent history says that they will have difficulty getting much done. This correction, and the reaction to the Fed catalyst feels a bit too well-anticipated to gather much momentum. If the aforementioned sideline buyers do not chicken out, there will be plenty of support to the market. One thing that the bears have working in their favor is the bull market leader $BAC led to the downside this week, as well as the entire homebuilder complex (including $HD and $LOW). This pullback reminds me of the latter half of August 2012 — in keeping with that analog, there’s a November in our future, but probably not just yet.