Rev Shark: Still in Good Shape
09/15/2010 7:43 AM
A government that robs Peter to pay Paul can always depend on the support of Paul.
-- George Bernard Shaw
Market momentum cooled slightly on Tuesday as the S&P 500 confronted major overhead resistance at the August highs. If we can push through 1130 or so, the S&P 500 will be at the highest levels since May, but we have gone up almost in a straight line since 1050 and are looking a bit tired.
Overall the market is not in bad shape at all. We are a bit extended and need some consolidation, but there has been sustained momentum that has helped to push us through some key resistance levels like the 200-day simple moving average. If we can rest a little and digest recent gains, we'll be in good shape for an assault on those August highs.
The economic news has generally been better than expected, with the retail sales report yesterday being the latest positive data point. However what is probably helping to drive this rally most is the expectation that the Federal Reserve will engage in further quantitative easing. The Fed has been sending signals it is open to the idea of ramping up its purchase of bonds in one way or another, and the market is very aware of what that flood of liquidity did for equities in 2009 and early 2010.
There is an old saying that one shouldn't fight the Fed, and 2009 was a great example of why that's the case. Even though there never has been any tremendous economic improvement since the bottom in March 2009, the market went straight up for over a year, primarily because of the easy-money policy of the Fed. When there is flood of cheap money sloshing around, a great amount of it is going to be parked in the stock market simply because there aren't a whole lot of other choices.
Ultimately running the government printing press constantly will carry a cost, but that longer-term concern is outweighed by the force of cash looking for a place to go. We may pay a price down the road, but that has not been a good reason to battle against liquidity in the short term.
So if you are wondering what the driving force is behind this recent move, look to the Fed. More important, keep in mind the lesson we learned -- when the Fed is running the printing press, the market can easily do things we don't expect technically, like go up in "V"-shaped fashion on diminishing volume.
I don't want to dwell too much on macroeconomic considerations, because in the end we always need to focus on the action in individual stocks -- and lately that action has been quite good. There have been some impressive pockets of momentum, individual stock-picking has worked well and the bears just haven't been able to make much progress lately.
At this point, we are extended and could use some rest, but we can easily afford a few soft days. In fact, it would be quite healthy if we churned and built up some bearishness. I have seen a number of comments lately about how market players are too negative, but I'm not seeing that reflected in the high level of speculative action in the market. If there is a lot of bearishness, it is mostly coming from pundits in the media rather than traders who are trying to make a buck.
The big picture looks pretty good, but with some major overhead resistance nearby and overbought conditions, we shouldn't be at all surprised to see a bit of softness in the near term.
We have some slight weakness in the early going. Japan was up big on a move to weaken the yen, but Europe is red and we are set to open slightly negative
