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QQQ - Daily analysis June 11, 2021

Long
NASDAQ:QQQ   Invesco QQQ Trust, Series 1
The biggest concern driving market movements is inflation with respect to Fed policy regarding quantitative easing. In this market, good news is bad news, and vice versa, e.g., when inflation is very good, this may signal a reversal of bond purchases from the Fed, and thus less support for the market. However, the market seems to have shrugged off the latest inflation numbers, which were the highest since 2008. This is likely due to base effects of calculating inflation and also the Fed's guidance of targeting 2% inflation on average, which means that inflation may rise above 2% before changing policy, like tapering bond purchases and raising interest rate. Previous guidance has suggested to buy tech if numbers are soft and sell tech if numbers are above expectations.

The question here is what is going to happen this summer up to Jackson Hole Economic Symposium in late August. This is where economists expect the Fed to announce the beginning of a tapering program. The last time the Fed signaled a decrease in QE , this resulted in the "taper tantrum", which was on May 22, 2013:

"Taper Tantrum": https://www.investopedia.com/terms/t/tap...

"Key events for the Fed in 2013: the year of the 'taper tantrum'": https://www.reuters.com/article/us-usa-f...

What Caused the 2013 Taper Tantrum?
In 2013, Federal Reserve Chair Ben Bernanke announced that the Fed would, at some future date, reduce the volume of its bond purchases. In the period since the 2008 financial crisis the Fed had tripled the size of its balance sheet from around $1 trillion to around $3 trillion by purchasing almost $2 trillion in Treasury bonds and other financial assets to prop up the market. Investors had come to depend on ongoing massive Fed support for asset prices through its ongoing purchases.

This prospective policy of reducing the rate of Fed asset purchases represented a massive negative shock to investor expectations, as the Fed had become one of the worlds biggest buyers. As with any reduction in demand, with reduced Fed purchases (bond) prices would fall. Bond investors responded immediately to the prospect of future decline in bond prices by selling bonds, depressing the price of bonds as a result. Of course, falling bond prices always mean higher yields, so yields on U.S. Treasuries shot up.

It is important to note that no actual sell-off of Fed assets or tapering of the Fed’s quantitative easing policy had occurred at this point. Chair Bernanke’s comments referred only to the possibility that at some future date the Fed might do so. The extreme bond market reaction at the time to a mere possibility of less support in the future underscored the degree to which bond markets had become addicted to Fed stimulus.

Many pundits believed that the stock market could follow suit, since the money flowing into the economy from the Fed through bond purchases was also widely understood to be supporting stock prices. If so, this market reaction to the prospect for Fed tapering could potentially sink the economy. Instead, the Dow Jones Industrial Average (DJIA) made only temporary declines in mid-2013.


Ultimately, all indices showed strong performance even after this announcement once the market realized that the panic was unwarranted as the Fed continued bond purchases with another round and signaled strong faith in the market, which boosted "investor sentiment and actively managing investor expectations through regular policy announcements"

In the latest round of inflation reports, the inflation was high, but the market shrugged it off and continued asset purchases:

"Inflation is hotter than expected, but it looks temporary and likely won’t affect Fed policy yet": https://www.cnbc.com/2021/06/10/inflatio...

"US consumer prices climb at the fastest pace since 2008": https://www.ft.com/content/6d9a5ae5-43fe...

"Consumer prices jump 5% in May, fastest pace since the summer of 2008": https://www.cnbc.com/2021/06/10/cpi-may-...

In this latest view, prices have jumped above moving averages, signaling price momentum on the buy side. I believe the market will test all-time highs, but it is too difficult to say if this summer will see a massive ramp up in inflation . This is because of the effects of COVID. Will the vaccines result in less lockdowns worldwide and thus spur purchasing? Will people return to work? Will fiscal stimulus continue with the Biden administration?

I predict that prices will test all-time highs again and proceed higher for the next two months. However, to mitigate risk, I'm going to sell enough assets to be 50% in cash.
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