With QE Winding Down, Should Traders Be Worried?

Most investors weren’t surprised by Bernanke’s remarks

   

Stocks closed fractionally lower after Wednesday’s highly volatile trading session following remarks by Fed Chairman Ben Bernanke. He hinted at the possibility of an early conclusion to quantitative easing — could this be the trigger that sets off a market correction?

As Expected, Bernanke May Be Shutting off the Tap

The Dow Jones Industrials had been up as much as 120 points in the morning when the chairman was giving prepared remarks to Congress, but sold off when he offered some hints in a question and answer session that offered some hawkish nuances.

The move lower was then aggravated by the release of Federal Reserve Open Market Committee (FOMC) meeting minutes from last month that exposed some discord regarding conditions for and timing of any winding down of QE.

Bernanke’s statement that purchases could be reduced “in the next few meetings” should not have been that a big surprise as some form of reduction in QE purchases by this fall was widely considered possible.

In Other News…

As for real news, there was some of that too. Earnings reports from retailers Target (TGT), which gapped down Wednesday beneath the $70 level that it has held since early April, and Lowe’s (LOW) were seen as disappointing.

I have been anticipating a break from the rally we’ve been in but I want see if it manages to keep up before putting on shorts and puts. However, should a bearish trend materialize, those most vulnerable to a sizeable decline are in tech stocks like Microsoft (MSFT) and Intel (INTC), consumer staples like Proctor & Gamble (PG) and Kimberly-Clark (KMB), REITs and utilities.

Major Investors Didn’t Bat an Eye

One thing we can say is that there have not been a lot of downgrades of second-quarter guidance, either from companies themselves, or from analysts. This adds a measure of support as it helps investors feel comfortable with the status quo.

Furthermore, while Wednesday’s sell-off was sharp and abrupt, the S&P 500 Volatility Index (VIX), known as the “fear gauge,” barely budged — finishing up a mere 3%. This suggests that the remarks did not really scare major investors, and that the equity markets over-reacted.

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