The Market Has Called The Fed's Bluff

Overview:

The market has called the Fed's bluff - Last week's report, "Is the Fed Bluffing?" discussed the possibility that the Fed is "bluffing" in regards to ending monetary easing.

A slowdown in monetary easing is unlikely as US economic data continues to be weaker than expected. In addition, Europe's continued recessionary problems provide a need for continued liquidity to prevent a larger global slowdown.

As a result, equity investors continue to aggressively move into US equities. The recent "steady" trend of the euphoric-Fed-driven market has become more pronounced.

The breakout of this "steady" trend may provide nimble investors another entry point into a rising market. Investors may want to focus on sectors that continue to outperform the S&P 500 - as the current rise in the market seems to be mostly momentum driven and not driven by fundamentals.

Last week, this chart of the S&P 500 (SPY) was included in the Weekly Macro View, showing the steady rise of the current trend:

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Source: Riverbend Investment Management

This week, the S&P 500 has broken out of the "steady" trend and has accelerated upward - another sign of euphoria in the market.

However, this breakout does present an interesting risk/reward ratio for nimble investors.

The past trend line may be viewed by many, especially technical-based traders, as an entry level in a rising market:

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Source: Riverbend Investment Management

Investors continue to reward sectors with positive relative strength vs the S&P 500 index without regard for fundamentals.

Consumer Discretionary (XLY):

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Source: Standard and Poor's

Financials (XLF):

(click to enlarge)

Source: Standard and Poor's

Healthcare (XLV):

(click to enlarge)

Source: Standard and Poor's

Industrials (XLI):

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Source: Standard and Poor's

Investors should keep a close on the Fed's balance sheet to see what the Fed does vs. what they say.

A reduction in the Fed's balance sheet may provide investors an early indication to shift out of equites.

(click to enlarge)

Source: Federal Reserve