Federal Reserve System: Did Janet Yellen Interrupt A Stock Market Correction?

Martha Stokes, chartered market technician (CMT), co-founder and chief executive officer of TechniTrader, spoke to the International Business Times about a major shift that is currently occurring in the stock market between the sell side and the buy side, and whether Federal Reserve Chair Janet Yellen interrupted a stock market correction.

IBT: What major shift have you seen between the sell side and the buy side?

Stokes: The major shift between the sell side and the buy side is that it used to be the sell side, which most people see as Wall Street, big banks and financial services companies that used to really control the overall market and what was going on.

The big shift that’s occurring is the buy side, which are your mutual funds, your pension funds, all of those giant institutions who hold long term a lot of the big blue-chip stocks and also invest in small caps and IPOs. They have taken more of control of and are leading the market more than they ever have before and are really dictating what is going on. They’re determining how they’re going to trade and invest and how they’re going to use the sell side. Before, the sell side was constantly advising the buy side as to what to do, whereas now the buy side is saying this is what we want, this is how we’re going to do things, and they’re changing the whole market structure as they go along.

IBT: What are currently the nine main market participants?

Stokes: The nine market participants are institutional investors, as both the sell side and the buy side, the big institutions. Institution traders, these are professional traders, humans, who trade the market for or on behalf on the sell side or the buy side institutions.

Wealthy individuals. We have 10 million billionaires in the world now and they are very influential in the markets. High-frequency traders are also a huge part of the market. Intraday, they are about 50 percent of the flow of volume.

Corporations are particularly important right now because there are so many corporations buying back their shares of stock, and that’s changing the supply-and-demand ratio. So they’re very important. Small funds are on the rise. We have more and more small funds. We have more foreign funds investing and nonprofits.

Then you have the retail investors who are independent investors who invest their own portfolio on their behalf. They don’t use mutual funds. Retail traders are coming back. Retail traders are people who trade the market short-term part-time or as a career trader. Then at the very top of this cycle are the odd-lot investors who aren’t in the market quite yet. They usually wait until the market is about ready to collapse before they decide to buy in. An odd lot is anyone who buys stocks for less than 100 share lots. A lot of people will buy three shares or five shares or 10 shares because that’s all the money that they have and they want to be in the market.

IBT: The Dow Jones Industrial Average saw its worst January performance since 2009 this year; however, stocks got a boost in February after Janet Yellen replaced Ben Bernanke as Federal Reserve Chair.

Did Yellen’s appointment interrupt a market correction?

Stokes: Whenever the Federal Reserve speaks, the markets appear to react, but if you were to take on any given day the identical comments from the Fed and, depending upon the bias, the underlying bias of the market on that day, the perception would be either a positive or a negative for exactly the same comments. The Fed is constantly trying to be ambiguous and understated. They don’t want to move the markets, but everybody wants a reason why the market did this or why the market did that. So the Fed often gets pegged as the reason why things are moving.

Now the technical patterns on the indexes show yes, indeed, the correction stopped at a technical- support level, not a fundamental-support level. So technical traders were heavy on the sell side which is common when it was selling down and as that technical support hit, they started moving and Yellen happened to be there at that time to give cause as to why it was rising. However, the underlying supply and demand is changing and the reason is we have a lot of corporations using buybacks, they’re buying back a lot of their own shares of stock. That lowers the outstanding shares and that lowers the supply of stocks available to for people to buy.

There are also fewer IPOs. In 2000, there were 9,800-plus companies listed. Today there are 5,900. So we’re almost short 4,000 companies from the year 2000 that you could have bought stock or institutions could have bought their stocks. The demand has been increasing because there are more mutual-fund investors, individuals wanting to buy mutual funds.

There is also a huge flow of bond money, ETF money and emerging market money. Money is being pulled out of bonds, being pulled out of ETFs, being pulled out of emerging markets and now there’s all that money sitting around and they have to place it, and they’re putting it in stocks, commodities and other areas as investments. So there’s a huge flow of money coming into the markets, and supply is shrinking and demand is increasing, so stocks move up.

IBT: After Janet Yellen’s first Federal Open Market Committee (FOMC) press conference in March, what was your reaction to stocks trading volatile in response to the possibility of interest rates rising six months after quantitative easing ends?

Stokes: Well, Yellen didn’t say that the Fed would raise interest rates, what she said was she is going to maintain interest rates at the level of purchasing assets, possibly into 2016, and then they would consider, but they could also determine to keep interest rates below the nominal for some time to come, depending on how the economy is behaving at that time.

Yellen really did not say she was going to raise interest rates. Three of the people on the 16-member [committee] voiced an opinion outside of the FOMC meeting, saying they felt that interest rates should rise, or would rise. That is what everybody latched onto to make a big statement, and get everybody got excited to do some profit taking and selling to the downside.

IBT: The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, has been hovering around the lowest point since the 1970s, following the financial crisis in 2008. However, the participation rate has slowly been increasing in the last few months and rose to 63.2 percent in March after bottoming out in October and December 2013 at 62.8 percent, the lowest point since 1977.

Does the labor-force participation rate have an inverse effect on the U.S. unemployment rate?

Stokes: The percentage of unemployment is a very variable factor and it can change all the time. Like Yellen said, there's two other factors that she was looking at that were marginally improved. The labor force itself has slightly ticked up, which is well below what has happened before in the past with recessions. The unemployment rate all by itself is not sufficient to really evaluate, but it is a standard by which they’re basing some of their decisions.

What I would like is to really focus on, and what Yellen was saying that I keyed into, is that imperative to better jobs, better pay and a growing economy is the risks of inflation being below 2 percent. In order to have an expanding economy, you have to have at least moderate inflation. We’re so low on the inflation side, that the economy can’t expand and what that means is, in terms of people who are employed, is that they have a job and they haven’t been given a raise. Until those raises start kicking in, we’re going to have a low inflation rate. That’s a concern because we want people’s payrolls to rise. We want more people earning more in order to have the consumer be a stronger force in our economy.

By not having what I saw and what I thought was most important was that inflation is still below 2 percent. Yellen is concerned about that with what she’s doing in relation to interest rates staying so low which causes a loss of income for a lot of companies. Also, the unemployment rate is still holding around 6.7 percent and that needs to come down a little bit. There’s a real balancing act between inflation being below 2 percent, unemployment hanging in there at 6.7 percent and being forced to keep interest rates lower, which puts a damper on the expanding economy.

We’re also not seeing any real wage growth, and that’s a problem. I think that’s probably more of a problem than the unemployment numbers at this point. I think that’s something that I really notice Yellen keyed into that a lot of the reporters just seemed to gloss over.

IBT: Although the S&P 500 has continued to hit new record highs in 2014, the percentage of stocks reaching new highs are fewer and fewer when analyzing their 200-day moving averages and 52 week highs. Is this a sign the stock market is headed for a correction?

We need to see a correction. Corrections are a necessary event to sustain the long-term trends. It’s trending up pretty sharply right now. There’s a lot of speculative new investors and they’re buying emotionally, but the problem is if you look at the S&P chart, we’re actually in a sideways pattern. I expect that we should start to see some correction pattern soon, which it definitely needs to maintain the integrity of the long term trend.

Without these corrections, it goes too speculative, then we have big long downdrafts that lasts months and months or longer, and you don’t want that. What you want is a shorter-term correction that patterns out some of the speculation, but also helps the integrity of that long term trend. So right now I see the S&P 500 and the Dow in a trading range, which is a sideways pattern, very wide, several hundred points, and I think that they’ll probably stay that way for a while.