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November 1st 2014. With the S&P closing at an all-time high we need to consider the possibility that the buck and SPX are no longer correlated. For all of 2014 so far there have been two fundamental plays. 1) The Federal Reserve Board’s plan to taper the extraordinary liquidity programme and “normalise” monetary policy eventually leading to rate hikes would strengthen the dollar. 2) This process and the likelihood of higher rates will pull the rug out from under the S&P 500 causing a well overdue correction. This may no longer be true.

Obviously we’ve had a correction but nothing close to what was predicted. The Halloween fun began on Thursday night when the Bank of Japan surprised the markets and announced that it would now buy Exchange Traded Funds and the Nikkei 225 took off to make new highs. The Yen weakened quickly and took out the previous 110.10 high with ease and closed above 112.00. That USDJPY move is the 3rd largest one day rally since the 2011 low.

What next? The most obvious level that sticks out for USDJPY is 115.00/50 (range expansion level and inflection points in 2002 and 2007). 113.10 may be a possible pausing point (61.8% of prior range added to breakout level). I will definitely be scalping on the long side only. Assuming that the Fed is not to follow the BOJ we can now surely expect to hit those USDJPY levels.

The tricky part comes next. Now we have the Fed contracting its balance sheet but the ECB and the BOJ expanding theirs.
Just as the Fed has finally done what critics of central bank manipulation of the market suggest and perhaps given some comfort to the short SPX traders, the S&P rallied aggressively to close at all-time highs too likely crushing those very traders who called for the Fed to get out of the markets!

This surely ends the fundamental play of an SPX correction simultaneously with Dollar strength. Should we now expect the equity markets buoyed by more central bank liquidity from both the BOJ & the ECB to continue higher while the Yen and the Euro continue to weaken?

It reminds me of the old quote “There is -only one side to the stock market; and it is not the bull side or the bear side, but the right side” Jesse Livermore 1877-1940. Gary Comey –