State of the Stock Market Analysis for the Week Ending October 18th, 2014 (The Stock Market Saw Goblins This Week  10-18-14) The Stock Market Saw Goblins This Week

Stocks closed out Friday on an up note, after a week of enough thrills and chills to strike fear in the hearts of even the most ghoulish of ghouls. It was a big week for the bearish camp, and we all know how much those bears love panic in the equity markets. It was a rough week that saw fear levels push the Volatility Index (VIX) above 30, and until we had the reversal on Thursday, all bets were off on this six-year old bull market. St. Louis Fed President James Bullard came to the rescue on Thursday morning, though, and his comments about the Fed reconsidering the October termination of bond purchases was all it took to send stocks soaring.

The Fed’s “official” termination of bond purchases was set to end this month, and the ongoing scaling back of purchases was down to $15 billion for October. With the stock market in a free fall this week, it was probably no coincidence that Mr. Bullard (who was traditionally hawkish on Fed policy) suddenly came out with the suggestion that the Fed should keep the spigot open wide for an extended amount of bond purchases. Stocks rallied hard and fast on that suggestion, and the bullish vibe continued into Friday’s rise, which left the majors with daily gains of 1.6% for the Dow, 1.3% for the S&P 500 and 1.0% for the Nasdaq.

Friday’s rally helped keep weekly losses for the major indices and the market in general to a minimum, and more importantly, it helped send investors into the weekend feeling calm, cool and collected. The good news was that the Federal Reserve stands ready for action if things get out of hand, but then again, the bad news is that the Federal Reserve stands ready for action if things get out of hand. Quick 400+ point plunges in the Dow Jones Industrials count as “out of hand,” so it was no surprise to have a Fed Head like Bullard giving his all to pump up stock prices. Bullard succeeded in a big way, but at the same time, the timing of his comments raised many concerns.

If we are six years into this post-Lehman crash and post-Housing Bubble recovery, then why is the stock market still so shaky and timid that it needs help from the Fed in order to keep it from crashing? As stated above, it is great to have the Fed in the game, but it is a head-scratcher as to why merely having the Fed’s bond-purchasing program coming to end is enough to send the U.S. equity market into a nosedive. The Fed may have planned to stop buying Treasuries, but during this week’s stock market plunge, someone else was certainly buying bonds as a “risk off” trade into a safe haven asset. The yield on the 10-year Treasury briefly dipped below 2% during the equity selloff, so it was clear as a bell that big money was pretty nervous this week.

Halloween is still a couple of weeks away, but the scariness for the stock market has been evident all month. First, it was fear of a global GDP slowdown, then it was the possible global spread of Ebola. Throw in the Middle East, Ukraine, a Chinese slowdown, and crashing oil prices and we suddenly had the makings for a frightening October. The stock market reminded us this week that it still can scare the pants off most investors in a blink, so maybe in some strange way, this week was a good reminder that money does not grow on trees, and stocks do not forever grow to the sky. We are halfway through October, though, and if we can make it past Halloween, the bullish vibe might reassert itself in a big way.

It has been a long, long time since we have had a “correction” of 10%, and it has been even longer since we have had an official “bear market” correction of 20% or more. From its mid-September high, the S&P 500 fell less than 8%, and that was before Friday’s snap-back rally bounce. These sorts of volatile weeks take time to plays out, so even with Friday’s surge, we could very easily see more “roller-coaster” action in the days and weeks ahead. Earnings have been mixed, and economic news has been good, but not all that great, Thus, there are still a lot of “unknowns” in play for this stock market. The good news, however, is that the Fed is ready to do anything to keep the stock market afloat.

Yes, the Fed has said how it wants to be more “data driven” and focused on unemployment and inflation, but the cat is out of the bag in that the MINUTE stocks fall too much, it sends a guy like James Bullard out to say anything to get the stock market to rally. That works great for a while, but it does not seem like a very smart way to run a Federal Reserve or an economy. We will see how this drama play out soon, but in the meantime, the Gorilla wishes each and all a wonderful fall weekend. Enjoy the peace and quiet because the stock market might act exactly the opposite when we are back in action on Monday. Again, have a great weekend!

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