Watching the stock market the past couple of weeks has made me believe that we have left the eye of the storm and are right back in the hurricane.  We've mentioned this before -- 2008 was the first wave and then in 2009 and 2010 we enjoyed the "eye of the storm" as the waters became much smoother.  We all knew that the relatively calm would give way at some point, we just all hoped it would be a few more years down the road.

Check out our BONUS ARTICLE:  The Reason America Was Downgraded

Look at the chart of the past 5 days, focusing in on Tuesday's action:

We all knew the market could bounce following the mini-crash on Monday, which followed a 4% drop on Thursday.  Throughout most of the day the bounce was pretty orderly.  Volume was strong, although not as strong as the day before, and there were not very many sharp moves.

Then the Federal Reserve released their statement at 2:18 ET announcing the results of their policy meeting.  Notice how quickly volume picked up and how quickly the market fell.

By 2:45 ET the market was down 1.8% on the day and a whopping 4.3% off the highs of the day!

What did the Fed say that caused such a quick drop?  They downgraded the economy, told us it could be years before the labor market picked up, and said they expected the economy to struggle through 2013.  Oh yeah, they also didn't announce QE3.

Then the market reversed.  The reversal was pretty orderly and like most days when the Fed meets, it ended up back where it was before the statement came out.

Rumblings amongst traders had begun filtering through that the statement that the Fed would keep rates low for at least 2 years meant two things:  1) The Fed won't cut the legs out from under the market by raising rates too soon, and 2) This is just the first bullet and that if the economy continues to weaken QE3 will be launched rather quickly.

The move the last 25 minutes was something I've never seen before.  The S&P 50 jumped 34 points (3%) in that short amount of time.  Moves like that are unsustainable, especially when it comes on NO news.  It smells of some sort of computer driven buy program that triggered levels (1154) in other computer programs that caused a rush of money coming into the market.

The market almost immediately ran up to the next line of resistance.

I found it interesting that the market stopped at the point it was at just before last May's "Flash Crash".  Also notice all of those big green lines following the flash crash.  I would ask anybody that is wanting to buy stocks here if they truly believe the world is better off now than it was last May.  I would remind them that last May Greece was needing bailed out.  This year Greece still needs MORE bailout money along with the much bigger countries Spain and Italy.

Several times throughout my 13 years with SEM we've been in situations that I know I don't like and I'm sure my family doesn't like them either.  It's when everything is teetering and I find myself checking the futures market and the news wires frequently throughout the evening.  I also wake frequently in the night wondering if something bad has happened overseas and more often than not, walk downstairs to check the news wires.  We are once again in that type of market.

Look at the action last night in the futures market:

Obviously there is much angst occurring in the overnight sessions as well.

Putting Our Faith In Ben Bernanke

As the market sold off on Monday I began hearing investors say that they were looking to Ben Bernanke to save the market.   Besides the fact that the Fed is not supposed to control the stock market -- they control the monetary system, all I could think of is how bad things must be if our only hope is Ben Bernanke.

Consider his resume:

• He had NO CLUE the housing market was imploding. 
• He has lied to the American people.
• He probably has committed fraud with taxpayer money.
• Just 3 months ago he told us the slowdown in the economy was transitory.
• Despite 3 years of massive stimulus from the Fed, the recovery remains the worst on record.

While the stock market rallied yesterday, the Dollar got CRUSHED yesterday following the Fed's announcement.  Maybe the Fed Chairman should stop worrying about the stock market and stop doing this:

I am somewhat encouraged that at least 3 of the 7 voting members of the Fed dissented on the latest policy decision.  Maybe they are sensitive to all the smoke in the room.

The fact of the matter is that the reason the market lost so much on Monday have not changed because the Fed said they are keeping rates low for 2 more years.  Look again at the reason the market endured the mini-crash on Monday -- we've had low interest rates for 3 years now and yet the economy still struggles.

Bigger picture, there was a very good reason America was downgraded and the Fed is ADDING to the problem not helping to solve it.

Taking a step back and looking at the market the past 5 years really puts things in perspective.  We are at the levels we were at before the Flash Crash in 2010 as well as before the banking system nearly failed in 2008.

I guess the question becomes, is this 2008 or 2010?  I just hope that it isn't like 1987, but the computer driven selling and buying certainly cannot be seen as a positive sign for the market.  

SEM's Hurricane Strategy

As we have for nearly 20 years, when the seas get rough, we try to make our way to land as quickly as possible.  That doesn't mean we won't see some damage, but the goal is to still have our vessel in tact when the seas calm.  It does mean at times if the weather forecast was wrong and we headed to safety too soon that we will miss some potential good times.  That risk is well worth it when you consider the catastrophic damage that can occur when you try to sail through a hurricane.

We have gone to safety now as we wait out the storm.  There will be days where it would have been nice to have participated, but we know from experience it is best to wait until things have calmed down.  It baffles me how after going through the hurricanes of 2000-2002, 2008, and 2010 why people still believe they just need to ride out the hurricane and then repair the damage once it is over.  There is another way and I wish more people realized that.

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