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By Keith Fitz-Gerald
Money Morning/The Money Map Report
As a professional trader, I’m never far from my trading screens. But I find that I’ve been watching them even more intently than usual over the past few days.
When I take a step back and attempt to assess just why I seem to be so concerned, I’m left with this answer: Were it not for the Fed, I believe this “record-setting rally” would have run out of gas some time ago.
Consider yesterday (Tuesday) as a case-in-point. Stocks were rather listless until the Fed’s minutes were released. That sent stocks up sharply, and both the Dow Jones Industrial and Standard & Poor’s 500 market averages closed at record highs. [For our news report on the Fed minutes report, and on the market’s reaction, please click here.]
Let’s rewind the tape back to Sept. 18, when a Federal Reserve interest rate cut played a similar role. The belief the rate cut was coming kept a flagging rally alive. And when that bigger-than-expected rate cut became a reality, stocks were up and way and rallying again.
Against this setting, the general perception today is remarkably similar, and the fact that stocks hit all-time highs seems to imply that it’s clear sailing into the fall. But nothing is a given in this business. This market simply seems exhausted to me, and I can’t shake the feeling based on 20 years’ experience that the proverbial “other shoe” may be out there and getting ready to drop. We’ve already had a housing slump, a subprime mortgage crisis and even a global credit crunch. And still the market keeps climbing.
That worries me. And here’s why.
Trading over the last few weeks has been largely based on two assumptions:
- The U.S. dollar will continue to weaken, and the U.S. Federal Reserve will abandon all attempts at supporting or rescuing the greenback.
- And corporate earnings both here and abroad will be largely positive.
Neither is guaranteed.
Earnings so far seem to be under control: There haven’t been any of the ‘whisper numbers’ that so often lead to investor disappointment, and then to a steeply dropping share price. Nor have we seen any earnings warnings. But either situation could change at any time.
I do have a couple of earnings-related observations, however. The third quarter already seems to be emulating the second in that truly global companies are using better-than-expected earnings abroad to more than offset lackluster profits here at home. And all of us here have noticed that wage costs and raw materials costs are rising in China, a situation that could lead to badly crimped profit margins if costs keep rising, or revenue growth slows.
But overall, earnings have been so far, so good.
So that leaves us with the Fed.
Since late August, the dollar has enjoyed a comeback of sorts: Granted it’s not roaring out of the basement by any means, but it does appear to be building a strong base, particularly when measured against the latest trading data.
What’s more, the employment situation – which really had appeared to be weakening here in the United States – actually did turn out to be better than expected based on the most recent readings.
Admittedly one report doth not a trend make. But let’s face it, Friday’s reasonably strong jobs report served to substantially undermine the fervent believers in the “Fed is going to cut rates again” crowd. When the masses realize the Fed may not cut rates again soon, a market reversal could result.
Moreover, no less than three Fed governors seemingly spoke their minds about the dollar vis-à-vis exchange rates in recent days. This is highly unusual, because they almost never talk about exchange rates. And it suggests to me that there are some behind-the-scenes machinations taking place inside Team Bernanke, where one of two things is happening. Either:
- The Fed governors who spoke out really don’t agree with Bernanke’s strategies or decisions, and are trying to publicly distance themselves from him in the event the dollar flops.
- Or these Fed governors seemingly spoke out-of-school and out-of-turn as a kind of ‘trial balloon,’ to get an early reading on the impact of a potential exchange-rate-boosting, interest-rate hike.
Perhaps – for me – that’s where the market appears tired.
Without the repeated injections of Fed-brand jet fuel, this Bernanke-piloted market would have trouble staying airborne. And if there’s a jet-fuel boycott (in the form of an interest-rate increase), then Air Bernanke will be grounded on the runway.
If you’re concerned, as I am, here are a few potential action items to consider:
- First, set protective stops on any of the holdings you’re most concerned about, particularly holdings where you have large profits at risk.
- Second, rebalance your portfolio to include the diversified overseas companies I call the ‘global titans.’
- And, third, steer clear of mortgage-related holdings: The much-heralded “recovery” is, at best, premature, especially ahead of credit-crunch-related earnings reports.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.