Three Themes Heading Into Next Week

This is the intro to the weekly report posted for our members…

The market just completed a huge week that saw the S&P 500 move 100 points. That’s right, 100 points in one week. The index dropped 44 points Monday, Tuesday and Wednesday and then rallied 57 Wednesday, Thursday and Friday. Normally a big week entails the market starting on one side of the range and traveling to the other. This week the market started near the top, got clobbered and then rallied furiously to recapture all the losses plus a little extra. This is exactly how bottoms are formed (from a technical standpoint). Panic selling gets quickly reversed and becomes hysterical buying.
For the week, all the indexes posted small or moderate gains, and all closed at their highs of the week. The Nasdaq, Russell and S&P mid caps are very close to hitting new highs while the Dow and S&P have work to do.
There are three main topics to discuss from last week…1) the government shutdown and debt ceiling talks, 2) Janet Yellen officially being nominated as Fed chart and 3) Fund managers under performing. Let’s go through each one.
The Government Shutdown
The slightest hint Congress and the White House were getting close to an agreement sent stocks soaring last week. So while the market was due for a correction off its high, there’s no doubt the shutdown intensified the selling pressure. I’ve said a number of times the shutdown was a non issue (other than those who missed out on a paycheck), and it would have zero long term effect on stocks. The market’s reaction somewhat confirmed this. A budget agreement still has not be reached, but assuming one is agreed on in the next week, the market should be free to go about its business. The long term trend is up.
Janet Yellen as Fed Chair
Yellen is more dovish than Bernanke. That means she is even more in favor of QE, and if left on her own, she would not taper the Fed’s bond purchases…and she probably won’t have to any time soon. The Fed certainly won’t taper at the next meeting. They are data dependent, and there’s no way the unemployment rate drops below 7%. The meeting after that is a week before Christmas. Given layoffs that may have occurred during the shutdown and hiring that takes place during the holiday season, I don’t see them tapering – even if the data supports it. Yellen is so dovish, she will err on the side of keeping the punch bowl spiked. The next meeting after than is late January. I guess it’s possible, if the data supports it, tapering could take place there. If not, the following meeting isn’t until mid March.
Wall St. expected tapering last month. It’s likely we don’t get it until January (probably not because that’s when Yellen officially takes over as Chair), and probably not until March. No tapering means more market gains.
Money Managers Chasing Returns
Wall St is a sick place. If the market is down 20% and a fund manager is down 10%, he gets a pat on the back and a “nice job.” But if the market is up 20% and he’s only up 10%, he’s screwed. Right now the S&P is up 19.4%, and hedge fund managers are lagging big time. If managers get desperate, if they get the feeling their jobs are in jeopardy because their returns aren’t very impressive, they’ll chase stocks higher into the end of the year.
Between the government shutdown ending soon (hopefully), full QE (not even a small taper) until at least January and hedge fund managers chasing returns, the next 11+ weeks could get a lot of fun for the bulls.
Let’s get to the charts.