Current SPY weekly chart: http://scharts.co/ZFMFJe
Commentary: Those that may doubt the power of the Fed should take note of our current stock market. We have been powering our way higher now for more than five years and at present I still don't see any signs of this bull slowing down. The talking heads will try to get investors to emotionally react to day to day fluctuations but the simple fact is the US Fed wants the financial system to get back on its feet and they will keep the cost of borrowing money at historically low levels until they see that has happened. Indeed, prices have risen so much we actually have a 'risky' stock market once again. While I don't foresee any break of real substance over the short term, one must respect the fact that we are fast approaching a seasonally tough window and may need to pause here before any further appreciation in price can occur. Ironically, that pause may come from geopolitical tensions rather then any locally based policies.
Fundamentals: Corporate earnings continue to grow and interest rates are at historically low levels. Considering these are basically the two key ingredients in stock market valuations one shouldn't be too surprised to see surging prices. The Fed has engineered a recovery in the US economy and that is exactly what they got. The current US yield curve (http://stockcharts.com/freecharts/yieldcurve.php) is very healthy and suggests there are no signs of recession anywhere on the horizon. While that may change over time, at present the economy appears to be chugging along rather nicely. There were growing fears of a new housing market bubble but hawkish talk from the Fed through the first quarter seems to have thrown some cold water on that. Indeed, that cooling has now prompted dovish talk from the Fed and the general consensus is for rates not to begin rising again in earnest until we are well into 2015. The only Caveat to all this is geopolitical tensions. Should eastern Europe erupt into a state of war, both economies and equity markets may feel the sting as commodity prices may move higher in earnest. higher energy prices alone shall act as a natural break to the economy and should prices spike dramatically we may see an economic shock. Ironically, this potential scenario may actually do the Fed's work for them putting them on hold for an even longer period of time.
Technical: We are fast approaching our typical seasonal peak in the stock market (Sell in May and walk away) and one can not help but get the feeling we are rather over extended. That in itself is not justification for either covering long positions or outright shorting but simply should be a warning to those participating that we definitely do have a bit of risk priced into this market. Considering the late January/early February lows are right on our red trend line, I for one shall be looking for that level to be tested through the seasonal trough expected shortly. This year's January Barometer report (https://docs.google.com/file/d/0B9fuWeR8s0OKRDFfelJtWEo3TlU/edit) did suggest we would see new highs through the summer. With this in mind, I shall be looking for a slight pullback through late May / early June and then a resumption of upward pressure through the late summer. Interestingly, that same January Barometer report suggested this fall may be a tough one. Considering how far away the 50% level, the 200sma and the lower trend channel line (Blue dotted) are a correction of substance shouldn't be too unexpected. That event is many months away and we shall deal with that scenario as we head out of summer and into the fall. Until then, the march higher continues in earnest.
Rational Summary: The post US housing market meltdown bull rally is now well into it's fifth year. The Fed has engineered a recovery by basically guaranteeing bank profits. Should they decide to remove their QE stimulus programs we ought to see a period where the market has to adjust. That event is not here at present. it will be one day but it is not today. Corporate profits are robust and shall continue to be so until the cost of borrowing rises in earnest. We are fast approaching a seasonally tough time for the market so a pause certainly wouldn't be unexpected. Put it all together and one is left with the impression of a market that is overextended but remains pointing higher.
Trader Stance: As the market continues to make higher highs and higher lows traders have been best to buy breakouts with stops just under previous lows. one might argue bullish resolutions around the 13ema (blue moving average) have also represented interesting entries as well. As long as we keep closing price above that 13ema traders are best to remain with a long bias. Should we close below that level, traders would be best to look for a tag of the 30sma which really isn't that far behind.
Investors Stance: While the media will try to get you to panic, there is NO reason for investors to even consider liquidating positions at this point. Yes our time tested 'investor' trend indicator (that being the relationship between the weekly 13ema and the 30sma) is quite wide at this point, it is still very much bullish. Until that relationship changes, investors are best to enjoy the nice dividends being paid quarterly and appreciate the huge capital gains they are sitting on from the last 'investor' buy signal issues way back in November, 2011.
Brian Beamish FCSI
The Canadian Rational Investor