Rev Shark: Tough Road to Quarter-End
09/28/2010 8:04 AM
"The poetry is all in the anticipation, for there is none in reality."
-- Mark Twain
The primary bullish argument for this market right now is that the Fed is likely to embark on another round of quantitative easing (QE). QE and the various stimulus and bailout plans are what drove this market straight up from the lows in March 2009. The obvious logic is that it worked very well once, so it is likely to work again and produce another leg up in this market.
It sounds pretty straightforward and logical. The Fed runs the printing presses, and the cash that is created drives the market up. The problem is that it is almost too obvious and is being anticipated to such a great degree that you have to start to worry whether it really will be that simple and easy.
As we all know, the market is a discounting mechanism. It tries to anticipate what will happen in the future and price it in currently. If the market is confident that an event will occur, it will attempt to determine what impact the event will ultimately have and then adjusts prices immediately.
Over the past month, the market has gone almost straight up. The foundation for the move was much worry about a double-dip recession and a very high level of negativity. What changed was that Ben Bernanke and the Federal Reserve started to hint that they are supportive of another round of quantitative easing. The high level of negativity combined with hope of another dose of liquidity is the reason behind this rally. Ever since Ben Bernanke make it quite clear that the Fed is open to "QE 2" in a speech a month or so ago, the market has been anticipating the move and trending higher.
Late yesterday, the Wall Street Journal posted an article that hints that maybe "QE 2" won't be as aggressive as many people are thinking. The article, which has the feel of a Fed plant, states, "Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds."
That looks like an attempt to scale back expectations, and it also comes as folks like John Mauldin start to question how effective quantitative easing really is when it comes to solving our economic ills.
On Friday, hedge fund manager David Tepper articulated the view that the bulls can't really lose here because either the economy improves and boasts stocks or it doesn't improve and we have "QE 2" which will boast stocks. That gave us some rather frothy action, but on Monday the excitement had already cooled, and now we have to watch to see if further doubts start to creep in.
We are at the end of the quarter, so there is some pressure to hold things up so that money mangers can post some good numbers. In addition, the technical condition of the major indices is still fine, and some strong pockets of momentum continue to emerge and exist, particularly in the high-beta big-cap names.
The bears need to start questioning "QE 2" and its impact if they are going to dig their claws into this market. There are some signs that it's happening, but so far, there isn't a sufficient enough technical breakdown to worry about it.
We have some minor gains on little news this morning. Consumer confidence is due out at 10:00 a.m. EDT, and that is likely to set the tone. With so many stocks extended and momentum cooling, it is likely to be tough going.
