Federal Reserve chairman nominee Janet Yellen did not disappoint the market’s in her confirmation hearing. Both the Dow (DJI) and S&P 500 (INX) hit record highs last week as Dr. Yellen held up well under some tough questions, repeating her belief that quantitative easing has helped the economy and that while asset bubbles need to be guarded against, we are not in any right now.
She is now poised to be approved by the Senate, and QE looks to continue at $85 billion per month until at least the Fed’s December meeting and likely longer than that.
Even with today’s market enthusiasm, we still need to be aware of some warning signs that are brewing. The Russell 2000 is down about 1% from its all-time high set on October 30, and we’ve also seen poor performance on the emerging markets stock exchange. Financial stocks have also been weak, which are considered a lead market indicator.
Such divergences, where more risky sectors underperform the broad market, are sometimes taken as a sign of potential problems ahead. The market does have a complacent feel about it, as not even very weak guidance from Cisco (CSCO), where revenues are expected to fall 10% next quarter after emerging markets orders feel by at least 15% in each of five different countries, caused much of an overall blink , though CSCO itself was down more than 10% over the past 5 trading days.
My plan is to watch these signs closely, and stay selective in new opportunities. At the same time I’m also maintaining a strategy of locking in vulnerable profits, taking advantage of chances to cash in when it’s advantageous.