Bernanke Is The Banker That Cried Wolf
The stock markets have rallied higher over the past week for several reasons. The first and most important reason for the stock market rally has been the comments of the Federal Reserve. Since the Jackson Hole speech by Federal Reserve Chairman Ben Bernanke the stock markets have rallied higher on expectations of a September quantitative easing.
Nearly every investor is expecting the Federal Reserve to begin another round of quantitative easing. It is important for all traders and investors to realize that the Federal Reserve just ended their last $600 billion QE-2 program in late June 2011. The last round of quantitative easing(QE-2) caused massive inflation around the world. Food riots broke out all over the Middle East and Northern Africa shortly after QE-2 was implemented in November 2010. Now since the Federal Reserve knows that traders and investors will chase the markets higher on any thought of a QE-3 program the central bank can simply hint that QE-3 is close without ever doing it.
How long will the stock market continue to believe the Federal Reserve? This is the billion dollar question that everyone is asking. The next FOMC meeting is on September 20-21 regarding any policy changes by the Federal Reserve Bank. This tells us that the central bank could dangle the carrot in front of the institutional traders and investors until that September meeting.
Short term traders should continue to watch the action in the financial stocks. Leading financial stocks such as J.P. Morgan Chase & Co.(NYSE:JPM), Bank of America Corp.(NYSE:BAC), Morgan Stanley(NYSE:MS), and Citigroup Inc.(NYSE:C) will tell traders everything they need to know. If and when these stocks begin to sell off that is a warning sign that traders are no longer buying the Bernanke put.