Why I'm Selling Into The Yellen Rally

Includes: DIA, QQQ, SPY
by: BubbleBustInvesting


In the old days, Wall Street rallies were fueled by strong profits.

In nowadays, Wall Street rallies are fueled by dovish comments by Fed officials.

But the Fed becomes less effective in influencing markets.

That's why I'm selling into these rallies.

There was a time Wall Street rallies were propelled by higher profits of the companies that are included in major market indexes like the S&P 500.

For a good reason, profits were considered the "milk" of Wall Street. That's why Wall Street rallies usually coincided with better than expected profit seasons.

In the post Great Recession world, Wall Street rallies are propelled by ultra-low interest rates.

There's a good reason for this, too. Ultra-low interest rates make stocks - all stocks - a better alternative to money in the bank.

It's therefore, no accident that recent Wall Street rallies followed dovish speeches by Fed officials, including the recent rally, which was fueled by a dovish speech by Fed Chair Janet Yellen.

Major US Equity Indexes 3/29/16



SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)




Click to enlarge

Source: Finance.Yahoo.com

But I have been using this rally to trim my exposure to stocks.

For three reasons: First, major market indexes are approaching old highs with low volume. That's hardly a bullish indication.

Second, markets are heading north, as earnings head south. That's a dangerous sign for equity markets, as I wrote in a previous piece here.

Third, the Fed is losing its magic, and its ability to influence the direction of equity markets.

Six years ago, the Fed assumed control of equity markets. We all know how that happened, too - through Quantitative Easing (QE), an unconventional monetary policy that drives long-term interest rates lower, directing investors into equities. That's how Wall Street recovered nicely from the 2008-9 financial crisis, reaching all-time highs.

Now, the Fed is losing control of equity markets, as the QE has created a disconnect between financial markets and the real global economy, which is gasping for growth.

Europe is floundering in the swamp of stagnation. Asia, which used to be the world's fastest growing region, has been rapidly slowing down, with Japan dipping from one recession to another.

America seems to be the bright spot of the world economy, but its moderate growth is elusive, driven by paper-prosperity generated by unprecedented monetary easing that is about to be reversed.

Compounding the problem, the US Fed - caught between two conflicting goals - failed to "normalize" interest rates, helping overseas economies cope with slow growth, and tapering speculation on Wall Street.

This isn't the first time central bankers are losing control of the equity markets. Back in the late 1920s, central bankers ran into the same problem.

We all know what happened to Wall Street two years later.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QQQ over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.