Fed’s Trillion-Dollar Infusion Concerns Traders

2020-05-21 | Simpler Trading Team

The Fed appears ready to print money endlessly to prop up a robust market, so how long will this government-infused support last?

It’s a question that causes a nervous twitch in the back of traders’ minds as they watch the market cycle erratically.

The week’s rally stalled Thursday as the Dow finished down 101.78 points at 24,474.12. The Nasdaq dipped by 90 points to 9,284.88 and the S&P 500 gave up 23.10 points to finish at 2,948.51 on the day.

The constant external push to keep the market in an upswing has made trading dicey over the past few weeks

A key issue is that Wall Street isn’t matching up with reality along Main Street America.

While stocks and indexes crave an upswing, daily life has suffered, i.e. tens of millions of jobs lost, entire industries like retail facing collapse, and a growing financial, consumer, and business ripple from the pandemic that likely changes economies forever.

Local reports, in almost all communities, continue to show businesses failing or filing for bankruptcy, and there are cracks in the foundation of the real estate market — residential and commercial.

It’s been just over two months since the economy slammed to a stop. In that short span nearly 39 million Americans are out of work. This year started unemployment at 3.5 percent — the lowest in 50 years. January seems like ages ago.

The sudden change is a staggering shock to the world’s most powerful economy.

With the threat of a stock market collapse, the Fed acted with extraordinary measures to support the economy, and thus Wall Street.

Here’s a quick recap of the Fed infusion:

  • Dropping interest rates to almost zero
  • Enacting quantitative easing (buying unlimited Treasury securities)
  • Promising to buy billions in corporate bonds to fund cities and states
  • Expanding crisis-response loans to businesses and citizens

The overall Fed economic infusion has ballooned to almost $3 trillion with an overall U.S. balance sheet to this point of $7 trillion — a number never seen before in this unprecedented scenario.

All this support may keep markets moving, but it creates that cautious twitch in seasoned traders.

The market appears to be trading on “hope-ium,” and that’s a treacherous strategy.

There is always an estimation that the upswing must end, and the result could be a bewildering crash.

While the Fed is pushing the gas pedal to the floor and telling everyone not to worry because the economy will return to its previous strength, people know reality doesn’t always match the narrative.

So, what do traders do?

As always, play what the market gives and don’t fight the flow. Looking long for the short-term appears prudent, while waiting for clear signals of a market shift.

Any considerable long-term stance looks difficult at best, and the general assessment at Simpler Trading is to stay within shorter time frames for setups.

Traders here are light on positions while maintaining cash and watching for strong directional signals.

We Saw: Markets taking a pause on the upswing — 

  • U.S.-China trade deal kicking into gear
  • Work from home appears to be new normal
  • U.S. government strives to delist Chinese stocks

We’re Watching: … For signs of upswing support faltering —

  • Oil demand, prices pushing positive
  • Stumble today, stocks still up on the week
  • Bullish action in: AAPL, BYND, EA, TSLA, WORK, DOCU

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