Prior to the Fed’s June 22 statement, there were enough positive technical developments to justify a belief that Chairman Bernanke would give the markets a much needed push. The market wanted some signal the Fed is willing to implement some form of additional quantitative easing (QE) sooner rather than later. That is not what the market got.
We are not in favor of money printing/asset purchases/quantitative easing. However, if you are going to use QE as a policy tool, it should be done before asset prices start to plummet again. Why did QE2 come into play? Asset prices began to fall in the flash-crash correction of 2010. It looks as if the Fed is willing to wait for asset prices to fall again before taking additional policy steps. That means we must continue to err on the defensive side in the coming weeks.
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