As noted previous, the Fed’s ‘extended’ easy money policy meant trends had ‘extended’ as well after the last FOMC ‘no-action’ and very accommodative press conference communication from Mr. Bernanke. First and foremost that meant equities could continue their sustained rise. That included the June S&P 500 future push above key resistance in the 1,334-27 range, which also left and UP Break above the higher end of that range. However, that is all coming into question in a more significant way than any time since the late-April FOMC meeting on the early week slippage back below that area this week. It has shifted the psychology significantly this week: whereas previous the challenge was on the bears to knock the market below it, the burden of proof is now on the bulls to reinstate the upward momentum back above the June S&P 500 future 1,334-27 range.
And it goes without saying that quite a bit of the continuing equities psychology is dependent upon continued dovish sentiment and accommodation from the looser central banks in the UK and US. This is partially a situation unto itself in the current fraught environment, where various problems and programs might weigh upon the equities. Those include everything from the ongoing risks in the peripheral European Debt-Dilemma, a decidedly hawkish stance of the emerging market central banks which are cooling economies to combat inflation (some would say driven by the easy Fed policy), the potential for conservative US politicians to get too aggressive with fiscal retrenchment that might directly hit the US economy (note the current fiscal shortfall in Greece in spite of draconian cuts), the headwinds from a still very elevated energy prices, etc., etc., etc.
Yet, the one other factor which may not be prominent in most market participants’ minds is that this particular phase is so very similar to a previous critical juncture. While the Bank of England minutes released this morning were a bit more dovish than previous due to sustained UK economic weakness, that means the further key rests solidly on the FOMC meeting minutes release this afternoon. That is because it was the less than fully accommodative central bank minutes back in May of 2008 that encouraged the significant failure of the key UP Break at the top of a major rally back at that time. That brought about the end of the early 2008 recovery, and reinvigorated the bear market that became so vicious later that year.