David Fry's Daily Market Outlook

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Includes: DIA, QQQ, SPY
by: David Fry

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The champagne's on ice. Advertisers are lined-up. Copy has already been written pronouncing the "official" end to the bear market of 2000-2002. And I guess we just need one more day as September and window-dressing ends. The party may be postponed until tomorrow so just get more ice.

The stock market's health for mainstream investors and the financial media is measured by the DJIA. As we flirt with record levels there it's important to remember that other equity indexes still have a ways to go. The important thing for bulls is the DJIA is the headline and a new high will affect psychology positively.

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The current psychology among institutions is to put all the previous bad news (housing, energy, inflation, Iran and so forth) investors were dwelling on either off to the side or in the rear view mirror and focus on the positive tape action.

This August/September rally is similar to the previous two years when markets sold-off heavily in the spring only to rally back as dip buyers stepped-up. The little noticed phenomenon that occurred during this period was the tremendous increase in the money supply while the Fed was raising interest rates. (To avoid noticing this M-3 was eliminated from view this spring.) But as has been endlessly pointed-out here, some talented folks at www.nowandagainfutures.com have recreated it.

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With trading desks, hedge funds, and corporations awash in liquidity provided by a generous ("your tax dollars at work!") Fed, it's been easy to keep markets moving higher.

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Just where did the funds come from to push stocks to previous highs this week? Not from Main Street -- that's for sure as noted here. As was noted two weeks ago, the Fed injected nearly $65B (chart courtesy of Jesse) in funds via repurchase agreements from September 18 through today. If a new high is made and trumpeted in the media perhaps Main Street will add funds -- maybe, maybe not.

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It's important to respect the tape. Mr. Market has been hijacked by a lot of money. It's frustrating to many, but it's reality. No matter all the stock pumping you hear/read to the contrary, stocks aren't historically cheap. But given today's financial realities there's literally "more money than brains" running the show.

Disclaimer: ETF Digest maintains positions in S&P 500 Index (NYSEARCA:SPY) and iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF).

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