Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Has The Institutional Money Lost Faith In The Fed?

When a trader or investor looks back at the past ten years of the market action they must wonder what really went wrong. Many investors are now calling the past 10 years the lost decade in the stock market. In 2000, the Dow Jones Industrial Average traded as high as 11,750.00. In 2007, the Dow Jones Industrial Average reached a top at 14,198.00. On the surface it looks as if the market recovered from the 2000 top which marked the tech and dot com bubble. However, the S&P 500 and the NASDAQ never made new highs the way the Dow Jones Industrial Average did. Please realize that the Dow Jones Industrial Average traded higher by 20 percent in 2007 from the 2000 high. The S&P 500 high in 2000 was 1552.00. The high in 2007 for the S&P 500 was 1576.00. This is a gain of just over 1.0 percent. The NASDAQ topped out in 2000 at 5132.00 and in 2007 the top was 2861.00. This index was actually lower by over 40.0 percent from the 2000 high. Today the Dow Jones Industrial Average is trading around the 10,000.00 level, the S&P 500 is around the 1050.00 area, and the NASDAQ Composite is trading around 2115.00. Now we can easily make the case for the lost decade after looking at these numbers.

In March 2009, the market indexes found an important low from the 2007 top. The S&P 500 traded as low as 666.79 on March 6th, 2009. Since that time the U.S. Treasury and the Federal Reserve Bank(U.S. central bank) coordinated a massive global stimulus plan to help inflate the global markets back to health. To their credit the methods have inflated the markets sharply higher. In April 2010, the Dow Jones Industrial Average traded as high as 11,258.00, and the S&P 500 traded as high as 1219.80. Everyone will have to admit the rally from the March 2009 lows was beyond impressive. However, can the market be inflated forever by money creation? Certainly, it is more complex than that, however, this is really what is going on. Is it sustainable?

It seems that the institutional money that would never bet against the Federal Reserve Bank has now lost faith in there ability going forward. The reason that I say this is because the bond market is telling us that. Many talking heads in the media keep calling the bond market a bubble, however, that may not be the case. Money has to go somewhere and if it is not going into stocks it will usually go into bonds. Simply put it is the institutional money that moves the markets. It is not the man or woman at home trading 100 shares in his on-line account that is moving the indexes. It is the institutional money that controls everything in the stock market. Yields are telling us a different picture at this time. Please understand that yields could bounce at anytime if money comes out of bonds. However, why are bonds so high right now? Things are not that bad, are they? In any case, the big money remains in bonds and until they move out and put money into stocks we can expect more lackluster action in stocks. There will be bounces along the way as there always are. However, the bond market is the driving force right now. We shall see what the Federal Reserve has up their sleeve in the future. Everyone knows that they always have something that they will try. As for now it looks as if the institutional money has lost faith in the Fed.

Nicholas Santiago
Chief Market Strategist