From the tightest five-day trading range in history, stocks surged to the upside on Tuesday to set new highs ahead of Wednesday’s all-important release of the latest Federal Reserve meeting minutes.
The minutes, which will release at 2 p.m. ET, will provide insight into the Fed’s thinking after bringing its “QE3” bond purchase program to an end last month.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.5%, the Nasdaq Composite gained 0.7%, and the Russell 2000 gained 0.5%.
Currencies were in play, and provided the motive force, after Japanese Prime Minister Abe announced an 18-month delay in the second phase of a planned sales tax increase (the first phase plunged Japan back into a technical recession last quarter) and the planned dissolution of parliament on Friday.
Abe is looking to hold snap elections to secure political backing to continue with his efforts to turn Japan’s long ailing economy around. He also ordered his ministers to prepare for a fiscal stimulus package as well.
The yen dropped hard in response — on expectations of more cheap money stimulus from the Bank of Japan — lifting the Nikkei index up over 2% overnight
Here at home, producer price inflation came in a little hotter than expected with core inflation rising 0.4% vs. the 0.1% increase analysts expected. That pushed the core measure to a 1.7% annual inflation rate, keeping pressure on the Fed to move ahead with its first short-term interest rate hike sometime in 2015.
At the sector level healthcare led the way with a 1.1% gain while telecom were the laggards, dropping 0.2%.
The epic consistency of the rally out of the October low continued, with the S&P 500 closing above its five-day moving average for 23 consecutive sessions — a record run that hasn’t been seen since the late 1990s.
The record, in case you were wondering, was 27 days set in March 1986. That was the year Brain, the first PC virus, spread; the year Pixar Animation Studios Inc. was founded; the year Microsoft Corporation (MSFT) went public, the year the Chernobyl nuclear power plant exploded, and the year Madonna’s Papa Don’t Preach dominated the airwaves and Top Gun ruled the box office.
The smooth easy rise has given investors a sense of confidence and inevitability. So much so that they’re comfortable holding individual stocks vs. the liquidity offered by large exchange-traded funds like the SPDR S&P 500 EFT Trust (SPY) on a scale that hasn’t been seen since late 2012. Over the past decade, similar bouts of overconfidence have been associated with market turning points most notably in early 2010 and the middle of 2011. It also happened at the final peak of the last bull market in October 2007.
For now, I continue to recommend subscribers maintain a large cash allocation with risk so high and the market so vulnerable to a violent downside correction. I think volatility is looking cheap here and have been recommending a modest position in the leveraged Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (TVIX) to Edge subscribers over the past week.
Major hurdles include realization that the Fed is preparing interest rate hikes in the months to come and the sure-to-be-contentious aftermath of any executive action on immigration from President Obama as well as the need to pass a new budget resolution in early December and deal with the debt ceiling in March.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
