Ding Dong The Summers Witch Is Dead

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 |  Includes: EEM, EFA, IWM, QQQ, SPY
by: Chris Ciovacco

Democrats Objected Strongly

Many hypothesized the financial markets were less than thrilled about the possibility of a Fed led by Larry Summers. The reaction in the futures markets Sunday confirmed the theory. From Bloomberg:

Lawrence Summers' withdrawal as a candidate for Federal Reserve chairman came after an unprecedented campaign to stop a Fed nominee even before he was announced, spearheaded by Democratic senators who took on a president of their own party.

Markets Cheering Larry's Announcement

The broader NYSE Composite Index is trying to make a new weekly closing high, but with a Fed statement coming Wednesday, there are still hurdles to cross.

Car Sales Bounce Back

As noted Sunday, the million dollar question is can the economy grab the baton from QE allowing the markets to remain in risk-on mode. Consumers made car dealers happier in August, providing some support for a successful baton pass. From Reuters:

U.S. industrial production rose in August as a bounce back in motor vehicle assembly lifted manufacturing output, a hopeful sign for the economy after growth got off to a slow start in the third quarter. "Growth in the manufacturing sector is picking up and will run faster over the balance of the year than has been the case in recent months," said John Ryding, chief economist at RDQ Economics in New York. Industrial output increased 0.4 percent last month after being flat in July, the Federal Reserve said. The rise was in line with economists' expectations.

Larry The Fed Chairman

Having a Fed Chairman named Larry would have devalued the Fed brand. When we think of famous Larrys, it does not conjure up images of advances in monetary policy.

From the perspective of the stock market bulls, there is no question having Larry out of the picture is value add. However, the Fed is still on track to begin tapering in the not too distant future, which means the bullish burden is shifting toward the global economy. If and when the Fed backs away from its bond purchase program, economic data will move to the forefront.

Investment Implications

Our market model remains allocated to U.S. stocks (NYSEARCA:SPY), and leading sectors, such as small caps (IWM), and technology (NASDAQ:QQQ). If the demand for foreign assets continues to improve, we will consider adding to our stakes in emerging markets (NYSEARCA:EEM) and a basket of diversified foreign stocks (NYSEARCA:EFA).

There is always something to worry about in the markets. In addition to the Fed statement, which is due Wednesday at 2:00 p.m. EDT, Tom DeMark's indicators are flashing "potential trend exhaustion" signals. At this point, we will treat them as set-ups that need to be confirmed. DeMark charts and indicators are proprietary tools from Market Studies, LLC.

Disclosure: I am long SPY, EFA, EEM, IWM, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.