Bernanke Makes Hawkish Comments

The market is getting whacked on Bernanke's comments about inflation and the Fed. What was looking like a garden variety selloff is turning into something fairly ugly.

Bernanke made comments that inflation is above his preferred range, and that the Fed must "anchor" long-term inflation expectations. That caused the fed fund futures to jump from pricing in a 50% likelihood of another rate hike to roughly a 70% chance.

It also caused the equity markets to swoon, although volume remains fairly light.

As for the sentiment indicators, the volatility indexes are rising sharply today. Last week, the spread in the AAII bull/bear survey was -19 (31% bulls, 50% bears). This was the third week in a row that the spread was negative. This often coincides with market bottoms.

The put/call ratio ran above 1.0 most of last week, and the ISE Sentiment Index made new yearly lows. Both of these are also more consistent with market bottoms than tops.

So although today is a rough day in the market, last week's lows have still held. I still think that with sentiment as negative as it is, the near-term direction of the market is higher not lower. But as we had gotten short-term overbought, a little (or big) shakeout is normal. No one said it was easy.
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