General Market Observations: Janet Yellen Yells: “Buy US Stocks”! (But not energy stocks yet)

Amid another week of what is considered to be poor economic data, the Fed on Wednesday worked its magic by removing the word “patience” from its statement and sounding a more dovish tone at the same time. The result was a wave of buying, sending the S&P 500 higher by week’s end, and the more growth-heavy Nasdaq Composite and Russell 2,000 indices to higher levels.“Don’t fight the Fed” was the rallying cry of the week, and with a June rate hike looking less and less likely now, it gives investors at least another few months of ZIRP to be in the market.

I have mentioned “Volatility” several times in this year’s commentary and we have seen a lot of it.  We’ve been hearing a lot of talk about the pickup in “100-point” days lately. Every day last week was a 100-point day, and just three trading days in the past three weeks haven’t been 100-point days!!!

I think all of these are signals that the end of “ZIRP forever” (zero interest rate program) forward guidance and extremely low rates will lead to higher uncertainty and greater opportunity cost for any type of risk. As the market becomes accustomed to this new environment I expect more volatility this year, in-line with my expectations for more volatile, although not necessarily lower, equities this year. This market keeps on plugging along even as bears cite weaker-than-expected economic data that has been steady since the start of the year. If economic data is acting as a pull on the market, the Fed and its dovish stance is acting as the push. Right now the push is the much stronger force, and “Don’t fight the Fed” continues to win. If I am just looking at what the markets are telling me and ignoring everything else that’s going on, then this bull is on very firm footing. Internals are strong, cyclicals and small caps are back to leading again, and buyers are stepping in anytime we get dips. Bears can fight the tape as much as they want by citing any number of negatives that are out there, but until they can gain back control of the price action, the proper course of action is to ride the rally… so we are long equities at the moment.
Looking Ahead To Week 12:

Lots of Fun Fed Speak: As is typical following the Fed meeting, this week multiple members of the Fed will be out to provide their views about the direction of Fed policy. Yellen did a good job of doing what she does best last week by stimulating the markets with some dovish Fed speak, but other members of the Fed are not as nearly dovish and you should expect that to have some impact on values in the near term.

More Econ Data: The Fed said it is data-dependent and so will be the market as we have about double the economic data than we did last week. Key reports on housing, inflation, manufacturing, durable goods and the GDP will be closely watched. Previously bad news is good news and markets will be watching to see if that continues.

Very Few Earnings: We are in the dead period for earnings and so that will continue to not have much of an impact, though it seems like everyone is concerned over the dollar’s impact to the next earnings season. Which is why the dollar, in the near term, will have a significant impact on stocks.

Poor Seasonality Ahead: With the Fed no longer adding liquidity to the markets, we are seeing more seasonal influences play out in the market. For example, last week’s rally during March options expiration, which tends to be strong historically. As for the seasonality, early this week is bullish, but the end of March tends to be a tough time for the markets as money managers clean up their portfolios and take profits before the end of the first quarter. Typically the weakness seen at the end of March, then sets up a decent long trade in early April and so we’ll see if this pattern plays out this year. Overall, seasonality suggests to be prepared for volatility this week.

THIS WEEK’S BOTTOM LINE:

Most of the economic reports came in a little soft last week, but that helped the FED to remain dovish.

As always, please contact us with any questions or concerns.

Greg

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