Traders Edge 8/20/12- Market meandering

Looking ahead over the next two weeks, I would expect trading to slow as we approach the Labor Day holiday state-side. This slowing of activity will only be compounded by traders anticipating both the upcoming Jackson Hole speech and the next Fed meeting, to be held Sept 13, where the central will hopefully clarify its position on any its future monetary stimulus plans. I continue to believe that the chances of the Fed enacting QE3 or whatever they decide to call it in the next round are fast diminishing, as money supply growth and the market turn higher, see the below chart. 

 

Currently, the aggregate market and the money supply figure are showing a 13-week annualized gain over 9%. In addition, the 13-week annualized growth in total loans and leases remains positive.

I believe higher loan growth decreases the probability that QE3 is the offing in any short time frame. You would also think that another round of monetary stimulus would positively effect precious metals and negatively effect the value of the U.S. dollar (the later due to exchange rates being the medium of equilibrium given short-term interest rates are pegged at near-zero rates). Both the gold market and the value of the UUP appear to be in consolidating trading ranges following their respective move. However, both markets lack conviction one way or another.

I think that if another round of QE were to occur in September, you would see more clear reactions in either gold or the value of the U.S. dollar.

This all said, I think another round of QE WILL happen. It is just a matter of time. However, the fed will likely wait for weaker statistics before firing off another monetary easing program, as they do not want to hurt their credibility. I also think the the equity markets are baking in QE in the short-term, and this makes the recent moves vulnerable. However keeping with the recent trend, I think the S&P 500, Russell 2000, and the NASDAQ will probably float upward towards the highs, if not spike them as we approach critical Fed dates. I also think that spike may mark the end of the recent run.

 The SPY remains overbought on the stochastics and volume remains anemic in this move.

Gold to become money once again?

Despite arguments and claims to the contrary from The Atlantic's Weismann, This report by the Economicpolicyjournal.com (one the best blogs on the web in my opinion), states that there is memo from the Fed floating around to banks suggesting that gold be included as Tier 1 capital under the new Basel III requirements. If this is true and comes to pass, this would be a seismic shift in banking, and would likely be the beginning of placing precious metals back in the realm of currencies. However, you have to wonder why the banks (and the governments for that matter) would want to make gold currency once again?

Don't hold your breath waiting for an Indian rate cut

The first thing I thought after reading this article was that a rate cut of India is unlikely, provided the global rise in food prices. The second was how many emerging market countries are or will be in the same boat?

I am thinking that growing moral of this story is that don't hold your breath waiting for monetary action either out of the Fed or some other central bank (other than Europe).