Still All About The Fed

Daily State of the Markets 
Wednesday Morning – October 13, 2010  

Publishing Note: I am attending a conference Thursday and Friday with very early meeting times. Daily State of the Markets reports will return on Monday.

Good morning. Although Tuesday’s trading session started off with a focus on the dollar (it was moving northward for a change) the day wound up being all about Mr. Bernanke and his friends at the FOMC. As if the recent Fedspeak wasn’t enough to convince traders that Bernanke & Co. was about to get busy again, traders decided that the minutes from the 9/21 FOMC meeting was the key to whether or not the QE2 would be launched in a timely fashion.

Given that the stock market has been in overbought territory for more than a month now, the little hiccup at the open wasn’t exactly surprising. The quick trip down to the recent support zone on the charts was sponsored by a modest rally in the dollar, which appeared to be a “just because” type of affair. And while it might have been normal for our furry friends to rule the day from there, the “expectations trade” quickly resumed and the dip buyers charged in after less than 30 minutes of downside activity.

But from where I sit, some of the thinking behind the heads-stocks-win, tails-stocks-win-too trade might represent an oversimplification of the situation and its potential outcomes. And while I know that markets can remain irrational longer than anyone leaning against the prevailing trend can remain solvent, I do have to wonder how much upside is available to a rally based on the idea that the Fed’s purchase of short-term bonds is going to ensure economic prosperity going forward.

Don’t get me wrong, as a card-carrying trend follower; I am not one to argue with a very nice uptrend. And yes, I do know that it rarely pays to pick a fight with the Fed – especially when they are on a mission (and make no mistake about it; Ben Bernanke is on a mission to ensure that we don’t see a repeat of the last 20 years in Japan on his watch). I am also happy to point out that I am positioned on the correct side of the current rally. But, unlike the February-April run, which was based on the economic data coming in better than the expectations at the time, this one appears to be built on the hope that the FOMC’s buying of government bonds is going to create loan demand, and jobs, and higher profits, etc.

I recognize that the mere appearance of the Fed taking action may be enough to increase confidence and that this factor alone may help return the economy to a more prosperous state. After all, more than one business survey has cited uncertainty as one of the primary reasons for employers remaining hesitant to hire.

However, since this rally is being driven by hopes and expectations of what could happen in the future, I am growing concerned about the potential for disappointment. But for now, I am cognizant of the fact that this market is all about the Fed. As such, I’ll continue to keep my eyes focused squarely on Mr. Bernanke and try to enjoy the remainder of the ride.

Turning to this morning… Stock futures are higher this morning on the back of earnings, a renewed decline in the dollar, and continued expectations of positive action out of the FOMC.

On the economic front… The government reported that Import Prices for the month of September fell by -0.3%, which was lower than the consensus for an decline of -0.2%. Export prices rose by +0.6%, above expectations for +0.2%, but below last month’s unrevised +0.8%.

Finally, try doing something nice for someone today (for no reason at all)…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.10%
  • Shanghai: +0.70%
  • Hong Kong: +1.45%
  • Japan: +0.16%
  • France: +1.58%
  • Germany: +1.83%
  • London: +1.41%

   

• Crude Oil Futures: + $1.31 to $81.95
• Gold: + $14.40 to $1361.10
• Dollar: lower against the Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.459%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +7.80
  • Dow Jones Industrial Average: +70
  • NASDAQ Composite: +13.75  

Wall Street Research Summary

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