Last week, we discussed that further market upside would remain challenging. As noted:
“Not surprisingly, the market didn’t make much headway this past week, given the current extended and overbought conditions. For now, ‘buy signals’ remain intact, which likely limits the downside over the next week. However, a retest of the 50-dma is certainly not out of the question.”
Such was again the case this week as concerns over the Fed tapering their balance sheet spooked investors. However, the Fed trained investors to “buy the dip.” Not surprisingly, they jumped in at the 40-dma to buy rather than waiting for a test of the 50-dma.(Although it was on lower volume and weaker breadth.)
The “buying frenzy” came following a near 2% “crash”in the financial markets forcing the Fed to “blink” on tapering. To wit:
“Dallas Federal Reserve President Robert Kaplan said on Friday he was watching carefully for any economic impact from the Delta variant of the coronavirus and might need to adjust his views on policy “somewhat” should it slow economic growth materially.”
We discuss below why we believe the Fed will still announce plans to taper as early as September.
Nonetheless, the bullish bias remains. Since the “shutdown” lows of March, the QE fueled rally has led to increased levels of complacency. With the assumption of “no risk” in the markets, investors buy dips on an ever shallower basis.
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