Remember when you first started to learn to ride a bike and your parents installed training wheels so you won’t take a hard spill? The reaction to Bernanke statement reminded me of that experience. For almost four years the “training wheels” or QE (buying bonds) have been the practice of the Fed, but now Bernanke has decided to raise the wheels a little to see how the economy reacts. I recall from my own experiences that after my father raised mine I was pretty shaky for a few days until I realized that it wasn’t so hard after all. This is my observation of what has happened these last three weeks with the markets. As I am writing this on Tuesday morning the market is up 118 points.
As you know, I use various market indicators to get a sense of where the market is heading. What I find most interesting is there were a lot more red lights in February than there are today; in fact, green is the dominate color. No one can predict a market and maybe I missed something; but I thought that when a person of Bernanke’s stature says the economy is getting better this would be good for stocks.
Since 1945, the market has corrected 5% to 10% every year. What we experienced in the market this month is a classic example of behavioral finance; where focusing on negatives instead of positives is one of the most prominent mistake of investors. The bull market is still very much intact and this adjustment or correction was needed and healthy.
Bulls do stop and catch their breath once in a while.