As the financial media get ready for another round of obsessing over the results of this week's FOMC meeting, MoneyShow's Tom Aspray discusses whether the Fed has another reason not to act.

The stock market stabilized late last week but the damage was done by mid-week as the technical deterioration had given advance warning of the market’s decline. Last Monday’s feeble reaction to the powerful gains on the jobs report was disappointing and short-term sell signals were generated.

The financial media is attributing the stock market decline to the growing consensus that the Fed may announce changes in their bond buying program at the conclusion of this week’s FOMC meeting. Thus, the dreaded tapering is again the focus of many analysts.

In August, I explained my view that more taper tantrums would be bullish, and the stock market’s correction ended about two weeks later. Since then, the improvement in the unemployment numbers has convinced some that the Fed can now justify tapering.

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Though it has not been widely discussed, it is my opinion that fear of deflation is likely to keep the Fed from changing its policy now. Last week’s Producer Price Index reflected almost no inflation at the producer level, and this Tuesday, we get the Consumer Price Index. 

The WSJ chart shows that the CPI is in a solid downtrend as it shows lower highs and lower lows (lines a and b). The chart also includes what the Journal refers to as the Fed’s “preferred measure of prices, known as the personal-consumption expenditures deflator.” On a year-to-year basis, it reflected a rise of only 0.74% in October.

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If the Fed waits until the inflation rate is high enough so they are no longer concerned about deflation, it could be several years before they start tapering. Though this is not grasped by many investors, market historians are only too aware of what happened in Japan.

The monthly chart of Japan’s Nikkei 225 goes back to the 1980’s and shows the reversal from the December 1989 high at 38,957 as the BOJ raised rates in an effort to stem the parabolic rise in real estate prices. As indicated on the chart, they started to realize that deflation might be a problem in 1990, but when the economy improved, they became nervous in 1997, causing another plunge in stock prices.

The NK225 made an initial low in May of 2003 as it was down 78.6% from the highs. A lower low at 7021 was made in early 2009. Though Japan’s bubble was not exactly like ours, it does demonstrate that a deflationary spiral is very difficult to overcome.

The US leaders made a similar misstep as the Japanese in 1937 when they cut off the stimulus too early and pushed the country back into a recession. I think we have learned our lesson and Ben Bernanke’s masterful job is likely to receive well-deserved accolades in the history books. I was disappointed last summer in the somewhat-shabby treatment he received from President Obama.

The plunge in gold prices  has not given the deflationists much comfort  as the SPDR Gold Trust (GLD) is down close to 27% YTD and continues to act weak. The bull trap I warned about in August slammed shut in November as the OBV led prices lower.

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Overall, there has been significant improvement in the global economy this fall, and I would expect it to get much better in 2014, which will justify even higher stock prices. The budget accord should also help the stock market in 2014.

The Global Purchasing Manager data reflected sharp improvement in November, and many were surprised that the United Kingdom was the strongest, followed by the Netherlands and Switzerland. The Global Composite is well above 53 with contraction only evident in France, Spain, Greece, Russia, and Brazil.

Several money mangers have been touting Europe lately due to its lower P/E than the US. Though their analysis may turn out to be correct eventually, the technical action suggests that now is not the time to buy.

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Tickers Mentioned: SPY, DIA, QQQ, IWM, IYT