Where is the Motivation to Move Higher?

Today we get to rehash the FOMC meeting through the minutes. Wow! What possibly can be buried in the notes that have not already been discussed in every other forum? There is the hope of a phrase or some glimpse the Fed will act at the next FOMC meeting relative to stimulus. There is dissension among the Fed Presidents relative to adding more stimulus and it could keep Bernanke from taking any action at the September 12th meeting. The key issue relative to the upcoming meeting is the economic data has not deteriorated, and in some areas it improved in July. Not the mention that stocks have moved up 3% as well in August. Thus, there may be more of a wait and see from the Fed.

What does all that mean for the market? If we have priced in action by the Fed over the last four weeks, then a pullback would be in order. If we have move higher due to earnings and data improvements the news won’t matter. It comes down to the investors interpretation of the forward looking economic climate and if stimulus is needed. That is a slippery slope and not one to base your investment strategy on. I am of the opinion that a correction or pullback in stocks would be needed as part of the catalyst for the Fed to take action. With the S&P 500 index pushing towards a four year high… it will be hard for the Fed to take action in September. Thus, the markets are in  a position of testing the recent move in the coming weeks as the month of August concludes, and we compile another month of data to measure against the Fed actions at the next FOMC meeting. Simply put… patience is a virtue and over the last six weeks the markets have been very patient as all this continue unfolds.

What about the “fiscal cliff” and “European meltdown”? Has the fear of either or both been removed? There is no doubt the immediate concerns have subsided relative to investor psychology, but they are still present. If the Fed or the ECB don’t have a strategy for addressing these issues going forward the markets will react, but for now the psychology of the investor has been positive as seen in stock prices and sovereign debt yields in Europe. The speculation around the solutions have been endless, but thus far no actions have been taken, and that is why the FOMC minutes are in the headlines. Hope of finding hints or insight into what the Fed is thinking is driving the news. The tightrope the Fed is walking of giving enough information to keep the investor engaged is a tricking game and one investors need to be fully aware of in managing the current market risk of their portfolio.

Are we at an inflection point for stocks? Is the market “overbought”? This is nothing more than a news driven market and has been since last summer. The three to four month runs up or down have all been the result of news or hope. It certainly has not been improving fundamental data or a growing economy. The current move off the June 4th lows has been driven by the hope or promise of stimulus. The hope in the US is the Federal Reserve will find a way to stimulate growth in jobs. In Europe it is the promise of Draghi to save the euro. Both have seen no tangible actions taken, but the buy on the rumor mentality has driven stocks prices back toward the March highs. How this plays out is purely a factor of the action taken. That may result in, sell on the news.

Watching the small cap index is helpful short term. If the trend is higher, investors are more willing to accept risk. If the trend shifts overall volatility increases for the broad markets. The S&P 600 Small Cap index is hitting against resistance at the 462 level currently. It has been a bumpy ride for the index, but the trend remains to the upside. If it shifts watch the broad market response. The advance/decline line is helpful as well as an indicator to what investors are doing as we push against the March highs. It is a time to be cautious and protect against the downside risks short term.

Commodities remain the leaders this week. Silver and gold both moved higher on Tuesday along with the mining stocks. The push higher is coming from the speculation relative to the ECB and the future action they will take. They continue to be the benefactor of the speculation and rotation from bonds. Financials broke higher, but faded with the broad markets late in the day. Watch the banks (KBE) to take on a leadership role short term if the push through the March highs is going to happen. Europe (IEV) is responding to the rumors of the ECB actions. If they disappoint and continue to procrastinate their actions watch the downside risk. Europe is still a dangerous market. Pushing higher on rumors isn’t the best strategy for sustainable growth.

Take what the market gives and keep your stops in place.