Suddenly the Fed is hinting they may start mopping up the flood of liquidity they’ve poured into the market over the last 4 years. When you break down the stock market game into its simplest form when money is cheap (Fed is keeping rates low) money flows into stocks where there is a potential for higher returns. When rates go up and money gets more expensive that money flows out of stocks and into asset classes that can benefit from higher interest rates.
A couple of key events have happened in the last few weeks that haven’t gone unnoticed by the stock market. One, the Fed talk used to be they would keep rates at 0 until the unemployment rate hit 6.5% which they did expect to happen until 2015. Well now they expect that in 2014 which believe or not folks in right around the corner. Two, the Obama administration has made it pretty clear that they will appoint a new Chairman to the Fed in January 2014 when Bernanke’s second term expires. Bernanke led us into the sea of liquidity and probably would like to leave office with a plan in place to get us out of it.
Timing wise the stock market is typically a leading indicator by 6 months. That means if the stock market is looking for money to get more expensive they’re going start selling now. No markets go straight up or straight down so I’m expecting a rally to continue for at least one more day which would provide us with a good opportunity to test the theory that this market has flipped the switch.
At this point, it’s all about the move to 1595-1600 on the S&P 500. That’s where the next battle takes shape. If you got long on Monday your best bet is to tighten stops. We’ve had a good run and it’s time to protect profits. Good Trading.