This morning, the S&P 500 crossed its 2011 high of 1343 in February. This movement implies strength; however, consider the following before getting too excited. The market has been volatile since the S&P 500 high of February and overall volume is low.
If the S&P holds or surpasses its current level, technical traders will see this as encouraging, but how will fundamental traders see it? Simply, the equity market volume is low because so much money has been and is still flowing into the overall commodity market. Although one cannot discount the influence of technical traders in the rise of commodities, the reason for the money flow is more fundamental than technical. To be precise, global economic demand, QE2, and the resulting weak dollar are the fundamentals driving money into commodities.
Come June, this dynamic could change. If, as expected, the Fed formally ends QE2, it is possible, if not likely, that money will begin shifting into the equity market. Now, the hesitation you “hear” in my “voice” is that the Fed will formally end QE2, and the idea of QE3 is dead, but the current $2.7 trillion Fed balance sheet is still very much alive and Bernanke has stated the “roll off” from its current “investments” in bonds will go directly back into the bond market.
This is the source of my hesitation to state definitively the money flow will shift from commodities to equities. I suspect at least some of the money will shift, but the question for me is to what extent the roll-off investment strategy will affect the money flow. I believe the answer will arrive in June and July when we see what investors do with the U.S. dollar. Yes, I guess we will see then, but tune in tomorrow for the first ever press conference given by the Chairman of the Federal Reserve. This event could shed some real light on what I discussed above, or it could not. The event could be a real market mover, or a snoozer. We will see …
Speaking of shifting dynamics … It appears the self-designed conservative momentum is shifting from a completely antagonistic position to one of reasonableness, and this is good news on so many fronts. Imagine Speaker Boehner saying the quote below three months ago.
Congress should consider cutting multibillion-dollar subsidies to oil companies amid rising concern over skyrocketing gas prices, House of Representatives Speaker John Boehner said on Monday. “It’s certainly something we should be looking at,” Boehner said in an ABC News interview. “We’re in a time when the federal government’s short on revenues. They ought to be paying their fair share.”
Given his staunch refusal to even consider this when Obama introduced the idea, I would say the political dynamic is changing, and it might have everything thing to do with the current polls regarding Republican economic proposals and the grass-roots uprisings across America protesting Republican attempts to fix state budgets. Put this together with QE2 ending in June, (no matter the ambiguity of it), the growing reality that Congress will raise the debt ceiling, and the ingredients for a big summer rally are going into the pot. As I said, be prepared …
Trade in the day – Invest in your life …
