Let’s face it, in 2013 almost every dip in the major stock indexes turned out to be a buying opportunity. Every time the stock market seemed to be starting a correction or meaningful pullback the central bankers came running out on TV proclaiming that low interest rates would remain intact for years to come. Just think about it, there has not been a single 10.0 percent correction in over two years. The last time the stock market even came close to a real correction in 2013 was in May when Ben Bernanke told the world that he would start to taper QE-3. As we all know, he quickly rescinded his statements and kept QE-3 going until 2014.
Recently, the economic data that has been released has been better than expected. The GDP numbers in the United States (gross domestic product) have improved, the job picture has picked up a bit, the housing markets have been rallying, and the stock markets have been soaring to new all time highs. So according to this data the Federal Reserve should start to taper its $85 billion a month quantitative easing program (QE-3).
In 2003, the Federal Funds rate (overnight lending rate to the large commercial banks) was at 1.0 percent. That year was one of the most bullish years for the stock markets in history. In June 2004, the Federal Reserve started to raise the Fed Funds rate by a just a quarter point and the major stock indexes came under some turbulence throughout most of the year. So this tells us that while tapering isn’t tightening it is a cut in the easy money that the stock markets have become accustomed to for the past five years. Traders should brace themselves in 2014 for much more volatility.
The Federal Reserve claims that there is very little inflation in the economic system. For all I know they might be correct, but deflation seems to be their real fear or they would not be taking this easy money policy stance for so long. So, will the buy the dip mentality work in 2014? Sure the buy the dip mentality will work in 2014 as long as you buy a low enough dip. The only way that traders and investors will know when to get back in will be to follow the charts. I remember in 2008 and early 2009 how people started to flock toward technical analysis for guidance, now people just buy anything and wait for the central banks to pledge more easy money. If the easy money policies are now really coming to an end those days of just buying the SPDR Dow Jones Industrial Average (DIA), SPDR S&P 500 (SPY), or some other ETF are over. The game is going to be a lot tougher this year, especially for those who thought it was easy.