Enfin

Or 'at last' as we say in English. Yesterday came the announcement that QE in the US is to be retired. The market took the news in its stride since it was well anticipated.

The announcement came with the promise that interest rates would remain low. This was designed to avoid panic as the tap pouring out cheap money was turned off.

There was, however, a change in the FOMC's view of another important indicator. They said that "underutilisation of labour resources is gradually diminishing". This is code for "there may soon be a shortage of labour and wages may begin to rise". So what we have here is the first admission that the specter of inflation may be poised to reappear.

At present the commodity markets are benign. Oil prices in particular are low. In a list of unleveraged commodity exchange traded funds (ETFs) only 16 out of 70 are up on a year ago and of those 6 are concentrated on the livestock industry. Others that have risen include coffee, zinc, cocoa and nickel. The big losers include sugar, wheat, other grains, precious metals and most importantly of all oil and its derivatives. The low prices of these important staples means that we are currently living abnormally cheaply. Any change in this benign situation, together with potential wage inflation could lead to inflation, a rise in interest rates and that would be the end of our bull market for sure.

All credit must be given to the central bankers for inventing QE. As a method of keeping a financial system, that had driven itself onto the rocks, from sinking beneath the waves it has performed superbly. Naysayers, and I include myself, have been proved wrong. The system did work and the UK which used the same strategy now has one of the healthiest economies in the West. The Euro Zone is embarking on its own version of QE.

We still don't know if the world economy will survive without the crutch of QE which transferred such huge sums of money from the state sector to private businesses and pushed the stock market to record levels. What we can be sure of is that the flow of money which found its way into the world's market has now been switched off. The supply/demand balance has been changed: no new money no new demand.

From now on we must listen even more carefully to statements by the World's central banks to see what they plan to do to keep the vehicle on the road.

Struggling to turn theory into practice

I continue to be impressed at how well those support and resistance lines work. Just look at the chart. I'm not cheating, I drew that line last Wednesday as higher levels of support gave way. Intra-day the level was pierced but by the end of the day the market rallied to settle on that support line. And then on Friday the rockets fired and we were on strong positive territory.

I placed support at around 16111  based on resistance encountered last November which turned into support that held the market twice in March and once in April.And that turned out to be where the market turned this time round.

I got it right with the FTSE too picking a support level around 6200. I described it as 'unconvincing' since it was based on just three previous support points back in April, none of which looked significant. As it turned out, that level held too and it looks as though today we'll see some follow through from Friday's upward thrust.

Struggling to turn theory into practice

The analysis method works well, it seems. But the big problem is how to turn theory into practice. Often I do not have the courage to believe my predictions and to trade in anticipation. Occasionally I do and I pick my moment badly and the turn I expect does not happen. Burnt fingers.

So then I see a potential turn and wait for confirmation. Result I am too late to the party and fingers get burnt again.

Trading in a choppy market is no fun. Oh for a nice smooth trend like the one I was too fearful to join that has dominated the US market for the past two, or is it five years. I have managed to pick bits of it successfully but not nearly enough to make for a happy life.

Update: free-fall or correction?

Too early to say whether this is a correction or the start of the fall that is bound to come, The free money fest provided by QE and long term low interest rates will end eventually . When it does there will be a big reevaluation of stock prices. Is that happening now? Still hard to tell.

What is interesting is that the support lines which I identified and put on yesterday's charts are holding the market slide for now. Watch out if they are broken.

I jumped the gun and am now in deep water. What now for the DOW and the FTSE?

Tough blog to write this one. I have been unwell and out of action for a few days. Nothing to do with the pea and and mint pasta I hasten to add. When I am unwell I find it hard to make decisions. Instead I let things ride. This was the wrong moment to do that.

At the beginning of last week I had the impression that the pull back in markets, which had been running for a couple of weeks, would be short lived. No harm in that but my mistake was to jump into the market in anticipation of a rise instead of waiting for confirmation that the the recovery had begun. I held on, fell ill and the rest is history.

I finally pulled out yesterday, nursing some nasty wounds. Have I pulled out just as the market was about to turn? It looked as though I had as the market spiked upwards during the day. But by the end  it had pulled right back and I was glad I had decided to bite the bullet. Obviously an earlier exit would have been better but there is no point in wishing for something you failed to do.

It is a common mistake to hold on to losses because "in the long term good shares will come back". This may be true, but the long term is an indeterminate period and it may be very long indeed. If trading costs are modest and there are no tax implications it is probably best to pull out and return to the market when conditions are more favorable. This has two advantages

• if you really are in a period of serious pull back you should be able to reenter a position at a lower price
• by the time it is a good idea to return to the market there may be better opportunities and you can recover your losses faster by buying faster moving shares.

So that's where I am now. Next question: What does come next?

What now for the Dow?

The Dow has pulled back 6% since its high on 19th September. Its biggest fall was 340 points on 9th October but there were several other big down days. There were also 4 recovery days early on, so during the early part of the slide there was definitely a battle between the bulls and the bears. The bears are starting to have it all their own way on modestly rising volumes. 

The other worrying factor is that two diagonal support lines have been smashed and a horizontal has just been broken. If we see no recovery now the next support is 200 points away at 16111.

And what of the FTSE?

The FTSE has fallen by 8.5% since the high on 4th September. Why so much? After all the UK economy is leading the world in its recovery. That is one of the big stock market paradoxes. Strong economy leads to weakening share prices. It is not such a mystery when you take into account the fact that interest rates affect share prices. Higher interest rates, or threat thereof, mean that the returns offered by shares are reduced in RELATIVE value. If you can get a better return from risk freeish bank accounts why take the risk of holding shares?

So the FTSE's slide has been accelerated by the threat that a recovering economy will allow the Bank of England to raise interest rates. This explanation has been dealt a blow by the lower than expected inflation rate announced yesterday. But we are still in frightening territory.

And up again - Pea and mint pasta recipe

It looks as though that last pull back was rather short lived. What we do have is a rather strong signal that our most recent low was higher than the previous one and that we could have a new buying opportunity. Hard to say how long it will last. It is likely to make a new high though.

The fact that I pulled out of my US shares does not worry me at all. The costs of trading in the US are low since there is no stamp duty to pay. Broker's fees are low too and spreads are minimal. I'm going to be looking for shares that were beaten down in the last pull back and are due for a nice rebound. I could be buying from this afternoon onward and expect to be fully invested by Wednesday. I suspect I need to move fast because this rally may be short lived and I will be taking my profits even more quickly than I did in the last rally. This time I will be grabbing the money as it comes and will not be waiting for the inevitable pull back.

I have held onto more of my UK shares since they have been doing better. But I still have some cash in that portfolio which I will reinvest. I'll let you know what  I have bought and when.

Pea and mint pasta

Another great vegetarian recipe for four people.

Use 350 gms any type of pasta shape that takes your fancy and cook as per the timing recommended on the packet. Add 200 gms of frozen peas per for the last minute of cooking.

In the mean time prepare the sauce. Blend about 200 gms of crème fraîche, 300gms of thawed peas, 100 gms grated mature cheddar, the leaves from a bunch of mint and salt. Blend until smooth. When the pasta and peas are cooked scoop out a mug-full of the cooking water, drain the pasta and return to the pan. Add the sauce and add the reserved water to achieve the consistency you like. Mix thoroughly and serve.

Down we go

The instinct which told me to pull out seems be the right one. I sold out of my remaining US shares today and am only keeping the rump of my UK ones because, for the moment, they seem to be holding up in the face of a dreadful FTSE performance.

The chart tells it all. The slide has taken it to withing 20 points of the previous low and it looks very ugly.

The Dow is making a second attempt to break through a two year old support line. It's a time to hold back and await developments. It is unclear what has spooked the market so it could still go either way. That last high should have been higher if the market was still on a roll. Time will tell. In the mean time it's best to be sitting on the sidelines.