Yesterday’s minor turbulence notwithstanding, the market has been climbing steadily skyward on the thermals of rising economic indicators and investors who boarded the rally while the recovery was merely a rumor have reaped impressive paper gains. Lately it appears that even Mom and Pop are beginning to get off the tarmac. In one of several signs that retail investors are reacquiring an appetite for risk, money market assets have fallen back to levels last seen in October of 2008 leading to speculation that Main Street has been fueling the latest leg of this up move.
Along with the highflying indexes, however, comes the danger that air pockets may lie ahead. Large numbers of professional traders have come to believe that the market’s current trajectory is unsustainable, leaving many looking for an optimal time to book profits. Traders love to buy on the rumor and sell on the news and this week’s FOMC announcement could provide the perfect opportunity. Any indication that economic strength may lead the Fed to curtail its stimulus activities could be the perfect opportunity to sell to late arriving retail investors excited by burgeoning signs of recovery.
Public interest appears to be growing now that the market’s ascent has taken it to levels that were unthinkable….in the summer of 2007! We’ve still got a long way to go and things aren’t all that good. Unemployment has yet to crest and apart from government deficit spending, we’ve yet to find an effective replacement for the lost consumer spending that’s been diverted to replenish America’s 401K plans. The market crashed last fall and practically burned in March, so like everyone else, I am relieved by the current rebound yet even the biggest bull has to acknowledge that serious economic headwinds could cause stocks to return to earth. Yes, things are less bad, but if third quarter earnings disappoint (and I believe they will) the market could soon be in for a serious altitude adjustment.