It’s difficult to draw anything actionable out of the Bernanke news conference, but Pimco’s Bill Gross is hinting at QE3. If Bill Gross is right, then the Fed isn’t seeing the same economic path as Gross right now, especially if the expectation is for August QE3. This reminds of the “New Divide” theme song from Transformer 2. On a more serious note, the only thing surprising about the sell off today is that it didn’t happen sooner and more aggressively. The Fed cut its projections on GDP and employment and raises inflation projections while extending the “soft patch” to possibly 2012.
How did I know there was a high possibility of a sell off yesterday? The ETF Rewind Pro dashboard and the daily SPY model offered several clues. First the real time daily SPY model flashed a cash/neutral combo before yesterday’s close. Second on the ETF Rewind Pro dashboard last night the Historical Volatility (HV) remain elevated close to 50 up from the low single digits, trend have turned reverting in the past 7 days, and the bias had turned neutral with two minus signs for a moderate negative outlook. All this are more conducive for a mean reverting trade today. BTW, did I mention that the gap tab showed 90% odds of this morning’s gap closing?
The big question now is whether this reversal signals the start of another failed bounce. Since the May 1st top, we had five failed bounce attempts, but the good news is that there is some substantial support at last week’s lows close to the 200ma and mid March low around 1250. Ideally, some basing and retest action might develop and allow us to work higher as second-quarter earnings season kicks off in a couple of weeks.
