Struggling To Stay Above Water
The major stock indexes are all struggling this afternoon to get into positive territory. The Dow Jones Industrial Average, NASDAQ Composite, and the S&P 500 Index have been sold off sharply by the institutional traders since the beginning of May 2011. The major stock indexes are down by about 7.0 percent since making a new high on May 2, 2011.
Last summer, was the last time that the major stock index had a severe correction. During that correction the indexes sold off for four months and pulled back around 16.0 percent. The catalyst for the decline at that time was a Goldman Sachs(NYSE:GS) indictment by the SEC, a Greek credit crisis, the BP(NYSE:BP) oil leak in the Gulf of Mexico and the unforgettable May 6, 2010 flash crash. That stock market sell off lead to the famous QE-2 announcement in Jackson Hole, Wyoming by the Federal Reserve Chairman Ben Bernanke in late August 2010. Could this current stock market correction be a replay of last years action? Will Ben Bernanke decide that the United States economy needs another dose of money creation? Is the economy going to be allowed to stand on it's own two feet? These are the questions that many traders and investors are asking themselves.
Many investors believe that Chairman Bernanke could be out of economic bullets to inflate the economy higher. After all, the Fed funds rate, which is the overnight lending rate to the large banks, has been at zero percent since December 2008. Meanwhile, the large banks can charge customers an average of 17.0 percent on credit cards and pay you almost nothing on a savings account. Many senior citizens and people on fixed incomes depend on their bank interest to make up their loss of earnings power. Unfortunately, these savers get punished. These same people who primarily live on fixed incomes also have to face much more expensive prices for all of their necessities such as gasoline, heating fuel, food, and almost everything else that one needs to survive. It is amazing how things have changed over the years.
We can only wonder if their will be a QE-3 in the near future. At this time, the major stock market indexes are really not down enough for the Federal Reserve to go into panic mode, however, these guys watch every tick in the market everyday. President Obama is also feeling the pressure as his approval rating plummets on a daily basis when it comes to the economy. Until the last few weeks, the stock market would rally when the U.S. Dollar Index declined, that relationship is not working the way it has in the past. When the U.S. Dollar Index declines the stock market inflates very little. This tells you that the institutional investors are losing faith in the Federal Reserve Bank's methods. Stay tuned, this looks like it is going to be a bumpy 2011 for stocks.