MLR - PMP 8-15-13

Published : August 15 2014 at 8:56 ET

Major averages rose yesterday on lower volume. The S&P 500 is now just above its 50-day moving average while the NASDAQ Composite is less than 1% off its high. Meanwhile, divergence in the lagging Russell 2000 which is a risk off index of small caps in this environment still remains below its 200-day moving average. Lagging baby stepping rallies on unimpressive volume with only a handful of leading stocks has been the essence of the markets since January 2013. With the Fed's monthly bond buying coming to an end, one would think this tired bull is ready to hibernate. Yet the Fed has pledged unusually low rates for a prolonged period.
But perhaps this Fed-engineered, money printing pony express has to gallop harder by accelerating their bond buying if they wish to keep the bull alive. This could devalue the dollar which would inflate the price of hard assets which would include stocks and commodities. Should this occur, the Fed would then have a hard decision on whether to risk toppling the economic recovery by raising rates to contain inflation. Stagflation could ensue. As one can see, the Fed has little room to maneuver at this stage.

The best approach is to participate in measured pattern, seeking optimal, low-risk entry points using pocket pivots and other less obvious buy points in stocks that are showing constructive behavior. There is no need to chase stocks as many more set-ups should appear over the coming days and weeks if this rally is for real. In this case patience becomes a virtue of selfish investing, particularly in this QE-powered environment.

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