Taper Talk: Are Markets Due for a Correction?

The media response to the post-FOMC market behavior has been dramatic. We’ve even been treated to some intra-Fed fisticuffs, with St. Louis Fed President James Bullard openly criticizing his colleagues for apparently giving presumably lame-duck Chairman Bernanke license to discuss QE taper timelines in his Wednesday press conference.

He Really Said That?
President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.

Perhaps Mr. Bullard has aspirations for the Chairmanship and wanted to show his tilt and determination. Whatever the rationale, the post-FOMC meeting selloff in most assets could well be the beginning of a significant price discovery process, and perhaps one that is long overdue. Note that price discovery in the classic sense excludes valuation fundamentals, which my routine monthly analysis suggests are at lofty levels.

Here is a linear chart of the S&P 500 daily closes since the March 9, 2009 trough. I’ve highlighted all declines of more than 5 percent between that major trough and interim highs:

Same Data, Different Math

Here is another perspective on the same data using a different calculation. Again with the March 2009 trough as the starting point, I’ve plotted the daily closes using a “percent off high” technique. In other words, I show successive new highs (interim or all-time) as zero and the cumulative percent declines of index closes that aren’t new highs.

Feel The Market’s Rhythm

The extent to which global QE has inflated asset prices is a matter of debate. The two-day selloff so far will be cited as evidence of those who see the markets as Fed-focused to the exclusion of fundamentals. As of Friday’s close, the S&P 500 is a mere 4.85 percent off its all-time high of May 21st. In the rhythm of the market, we’re probably due for a more substantial pullback than we’ve seen so far, taper or not.

Doug Short Ph.d is the author of dshort at Advisor Perspectives.

Don’t Miss: Here’s Bullard’s Problem With the Fed Policy Statement.