The beginning of a correction or just a bump in the road

The  S&P 500, DOW and Nasdaq Composite all sank following news that the Federal Reserve was considering reducing their quantitative easing program. The Federal Reserve’s quantitative easing amounts, in practice, to monetizing a large portion of the U.S. debt sold at auction. Widespread predictions of impending inflation, due to the quantitative easing (frequently referred to as printing dollars), have been published for quite some time but inflation is nowhere to be seen. On the other hand, the Relative Strength Basic Materials Sector has been sinking for eight of the last twelve months. This suggests deflation. In deflation, cash is king and debt an increasing burden. That’s why so many individuals and companies have been busily deleveraging their balance sheets.
Of course, it is anyone’s guess if the Federal Reserve’s statement was the predominant reason for Wednesday’s drop. Whatever the cause, it couldn’t have been very serious in the minds of big-money investors because the market moved sideways on Thursday and Friday. All three indexes are at historic highs having surpassed the 2007 peak. The fact that the market is above any previous highs means there is nobody who, having bought at a previous high, is holding on just to get even. This factor results in less resistance (or a reduction in selling pressure) as long as their is no other event that pushes prices down.

Basic Materials Relative Strength Chart:basic_materials

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