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Is the Fed Trying to Pull One Over on Investors?

Federal Reserve seems to be employing one of its most effective powers


Stocks opened up about 5% higher on Tuesday and retained the gain at the close. However, the Dow Jones Industrial Average gave up almost 50 points from its midday high to the close. Overall it was a quiet and featureless day of trading. The only noteworthy news was a suggestion from the president of the Boston Fed that an “aggressive open-ended bond-buying program” should begin in order to “boost the economy.”

At Tuesday’s close, the Dow was up 51 points at 13,169. The S&P 500 broke 1,400 for the first time in three months, closing up 7 points at 1,401, and the Nasdaq rose 26 points to close at 3,016. The NYSE traded 727 million shares and the Nasdaq crossed 463 million. Advancers led decliners by just under 2-to-1 on both exchanges.

SPX Chart
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The broad-based S&P 500 finally broke 1,400 with a modest rally. And the new high was confirmed by its stochastic, as well as our other internal indicators. Now all three trends — short, intermediate and long-term — are pointing up.

UUP Chart
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The trend of the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) is usually the opposite of stocks and commodities. Since late July, the index has been falling due to a policy shift in Europe, which is designed to bolster the euro. This relationship has been fairly solid this year with the stock market recently rising as the U.S. dollar falls.

The next support for UUP is the late June low at about $22.40, and then the 200-day moving average at $22.30.

VIX Chart
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The CBOE Volatility Index (VIX), commonly called the “Fear Index,” could now be called the “Apathy Index.”Readingsunder 18 usually indicate that stocks will head higher. But readings under 16 often warn us that investors are not focused on stocks. And extended periods like this often end with a shocking sell-off.

Note the March low, which fell under 14 and lasted for the entire month. It was fun while it lasted, but stocks double-topped in April and May, and tanked in early June.

Conclusion: Technically the major indices are now bullish for all three time frames. But the non-confirmation of the Dow Jones Transportation Average in its failure to follow its brother, the Dow Jones Industrial Average, in a challenge to the May highs puts a damper on the advance.

And with unemployment rising, Europe slipping into recession, and emerging markets on the edge of a slowdown, there is little in the way of fundamental support for a major breakout.

Tuesday’s reluctant move higher was the result of a comment by the non-voting president of the Boston Fed that the committee should embark on an aggressive bond-buying program, which would inject more cash into the system. The statement may have had an impact but it seems a flimsy excuse for a rally.

It does, however, illustrate one of the Fed’s most effective powers — “moral suasion,” or the art of talking the markets up without actually doing anything, a practice that the Fed uses when it has few other choices.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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