The press release following the Fed’s meeting earlier in the week sounded more like Adm. Dave Farragut – “damn the torpedoes, full speed ahead!” Investors were initially concerned that the Fed knew something the markets didn’t – the economic data is decent, so why is the Fed so worried about providing whatever is needed? Later in the week, the realization that the Fed was content to flood the financial system with money – keeping both the bond and stock markets propped up, gave investors all the reason they needed to buy stocks. September is certainly not behaving like a typical September; rising by nearly 10% vs. a usual decline, but October will be tested with Supply Management reporting on Friday and unemployment the following Friday. The comments from the Fed that got everyone’s attention were those related to wanting to see more inflation in the economy, meaning the Fed was willing to keep rates low for an “extended period” until inflation began to get going. Economically speaking, little has changed over the past year – and that is what has the Fed’s attention. Stock market investors are only interested in keeping the monetary gates open.
While the markets continue to slowly creep higher, the market internals are getting worrisome and in need of some “down time” to correct. For example, bullishness among investors (as measured by AAII and Investors Intelligence) is getting back up to levels last seen before 3-4 week corrections. The number of new highs hit on a daily basis, while good, has been well below that during the April peak. One saving grace has been the net number of stocks rising on a daily basis. An accumulation of daily “breadth” is hitting new highs – as is the one measuring the weekly net advances. So the majority of stocks are rising, investors are getting more excited about the markets, however the key missing ingredient remains volume. Reports from various brokerage firms are indicating lower trading by clients, inferring that much of the daily volume is coming from Wall Street, not Main Street. Many “investors” are sitting this dance out and watching the “traders” go through their daily contortions.
With a rising stock market, it is little wonder that bonds have been coming under pressure. For just the second time since mid-March, the bond model has registered a “sell”, indicating that rates are likely to rise in the future. However, since I am trying to capture the trend in rates, the model needs to show 3+ weeks of “negative” reading before it is formalized. What is creating the consternation in bonds are the rising price of gold and the lower dollar along with a Fed intent on getting inflation higher. Whether the mountain of money will get the economy going or create inflation remains to be seen, as many of the economic numbers point to a low and slow growth path for the economy – which means rates can stay low for quite some time. Rates may have bottomed and maybe now entering a range-bound period between 2.5% and 3% on the 10-year bond.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
