Stocks seek direction after Fed and elections
INSIDER
Credit: Reuters/Brendan McDermid
By Chuck Mikolajczak
NEW YORK | Sat Nov 6, 2010 5:58pm EDT
NEW YORK (Reuters) - Wall Street navigated through three major
landmines this week -- the elections, the U.S. Federal Reserve meeting
and jobs report -- with barely a scratch. Now what?
With earnings season winding down and a light economic calendar next
week, the market will be left to its own devices to sort out its
direction.
A rise of more than 16 percent in the S&P 500 .SPX since the start of
September had many investors expecting a pullback after the trio of
big events. But it appears to have emboldened them instead.
The CBOE Volatility Index, a measure of market anxiety, has slipped
below 19 and the late-week action suggests a market getting ready for
more gains -- not a sell-off.
"Some of the alternatives to stocks (bonds, cash, etc.) now look much
less attractive, which should push money in the direction of stocks,"
said Bill Luby, a private investor in San Francisco, who writes the
VIX and More blog. This will result in "reducing some of the downside
risk for owning stocks, and also putting downward pressure on the
VIX."
With the Fed supporting markets through quantitative easing, rates
could remain low for quite some time. That, in turn, should help
stimulate borrowing and make riskier assets more attractive. It could
take data of a momentous nature -- something that suggests the economy
is not responding to the Fed's plan to buy $600 billion in Treasuries
-- to cause anything more than a minor slip-up in the market.
"What the Fed is doing is a consistent increase in money supply.
Consistency will be much more important to the psyche of investors
than big spikes," said Edward Hemmelgarn, chief investment officer of
Shaker Investments in Cleveland.
That feeling permeated the market even before Friday's jobs data,
which showed the fastest payroll growth in the private sector since
April. It is difficult to see the market fighting Fed-led stimulus,
strong corporate results and labor force improvements.
DIAL 'M' FOR MOMENTUM
The Fed's intentions make the search for yield even more intense,
which could bolster financial stocks in coming days.
Financials climbed solidly higher on Friday, with the KBW Bank index
.BKX up 2.2 percent, on talk the Fed may allow stronger banks to
increase dividends. They could continue to climb as they have
underperformed the rally since September.
Call volume in the Financial Select Sector ETF SPDR fund (XLF.P)
surged, as option traders exchanged about 618,000 contracts in the XLF
on Friday, led by the trading of 480,000 call options. The overall
options volume was three times greater than its average daily
turnover, according to options analytics firm Trade Alert.
A correction might still occur, though. A number of indicators suggest
the market is in position to consolidate.
The 14-day relative strength index is at 88.5. A reading above 70
usually indicates an overbought condition. However, some analysts say
the indicator for an overbought market expands in a bull market. So
this level may not necessarily be a bearish indicator.
Bespoke Investment Group noted the rally has put the major indexes and
sectors into "extreme overbought territory" in the near-term, with the
S&P 500 and six sectors at or near two standard deviations above their
50-day moving averages.