As the stock market continues its bullish run, I am very interested in seeing how long it can continue to move like it has. With April 1st getting close and the first quarter earnings season about to begin I believe it will either strengthen or put a damper on the present move of the market. A negative pre-announcement earnings among S&P 500 (SPY) companies is at a very high level but stocks continue to move up as we hover at record highs. Yet the ratio of negative earnings to positive earnings preannouncement is at a 4 to 1 ratio.
But nothing has stopped this market and I am wondering if investors are getting fat and lazy. The VIX (VXX) is trading at or near pre-2008 levels and as a fear gauge, there isn't much there. Even if earnings turn out to be soft, analysts have probably dropped earnings forecasts already and bad news will already be written into the market. And if those companies beat the watered down estimates the market can continue to move up.
Bernanke This Week
When the Federal Reserve meets this week I am uncertain that there will be any change in its "loose money policy" since things are slowly progressing so well. If the Fed suddenly announced that they're changing their money policy it could rock the boat and trigger a move down in the stocks and I don't think the Fed wants to cause this to happen right now. For this reason I don't expect any new changes so bonds should remain close to the same and gold will stick to its bearish tendencies.
Eventually they will have to make a decision but it's a bit touchy and how the Fed will tighten money policy and the steps it takes to do so are going to have to be done with great care. With the improving economy it makes sense that cutting back on the amount of bonds being purchased is something that will be discussed but whether it is acted upon or not is another matter altogether.
I believe they're going to meet Tuesday and Wednesday and the market expects interest rates near zero while the $85 billion monthly easing program on mortgage debt should also stay in place.
What about the risk of inflation and growth that cannot be sustained in some markets, is this a concern because of the low interest rates and the Fed's continuous bond buying plans? Isn't this enough for the Fed to change the program right now? These are real and legitimate concerns, and I believe when Bernanke has his press conference he will have to verbally back the continuation of the asset purchases or the markets could react negatively. He will hold his press conference about an hour and a half before markets close on Wednesday this week.
Even though it doesn't look like people are really worried but are enjoying the prolonged bullish move, there are enough people concerned that the rally has reached its zenith and could possibly turn south soon. It wouldn't take much from Mr. Bernanke to cause a reactionary move down. The financial sector continues to look very strong and it usually leads a market rally. I believe the financial ETF (XLF) has increased in value by 13% since the beginning of the year and this is good for the markets overall.
I do not expect the economic news in the markets to change this week and for this reason they will continue to massage the steady climb up. The only glitch that I see this week would be in Mr. Bernanke's carefully crafted words after the Fed meeting which ends on Wednesday. When he speaks, he will either cause a reactionary move down in the market for the rest of the day because he says something that investors don't like or he will also massage the bull by saying nothing new. It is very easy for him to keep the markets going. I would be awfully surprised if he said something that would cause the markets to react negatively.