The Path Forward Appears Clear

Posted: Jul 18, 2012 12:01 AM

Good morning. Lots of folks are talking about the idea that the stock market is experiencing a case of déjà vu all over again at the present time. Given the similar chart patterns seen over the past two summers, the eerily familiar soft patch facing the economy once again, the similarities in the factors driving the action, and the general feeling that for the third summer in a row the outlook doesn't look very bright, I can't really blame anyone who might be looking ahead to the next month with some trepidation. The bottom line is that August is coming and if memory serves, last year's results were downright ugly.

However, I'm going to take off my bear cap for a moment on this fine Wednesday morning and try to look at the current macro picture as objectively as possible. Remember, Ms. Market doesn't give a hoot what any of us think, so we might as well check our egos and our opinions at the door and try to see things as they are instead of how we'd like them to be.

Sure, things in Europe (EZU) aren't going to get better any time soon. Yes, the economies of China (FXI) and the U.S. (SPY) are slowing at the moment. No, the boys and girls in Washington aren't going to suddenly start playing nice or accomplish anything on the fiscal front before November. And yes, earnings may have peaked for the time being. However, in listening to Mr. Bernanke's Q&A with the Senate Banking Committee yesterday, it occurred to me that the path forward is now fairly clear.

No, the Fed Chairman most definitely did not provide the little boyz playing with their computer toys any hints that another fix of QE was on the way. And not surprisingly, traders did throw a temper tantrum when they didn't get what they wanted - to the tune of about 150 Dow (DIA) points to the downside. (And as a quick aside, the fact that the computers can manipulate the market as quickly as they do these days continues to disturb me.) However, Mr. Bernanke did make it clear that he and the rest of the FOMC cavalry most definitely will ride again - if needed.

Thus, the key (well, to me anyway) is that there is no uncertainty as far as the Fed is concerned. Unlike last year at this time, there aren't any big glaring question marks hanging over the market's head. Greece (GREK) is not going to leave the EU in the near future. The Eurozone (EZU) is working on shoring up their banking system. In addition, there is no debt ceiling to worry about at the moment (the projections I've seen suggest that the earliest the U.S. would bump into its limits on borrowing again is early October). And China is going to do something, sometime to stimulate growth (however, officials may want to wait a few more months for the new leaders to take office).

The point is that with the path of the Fed now crystal clear, maybe, just maybe, the "Tepper Trade" is making a comeback - yes, right here, right now. Of course, I reserve the right to be wrong. However, as I've been saying lately, the market hasn't acted all that terribly bad given all of the purportedly bad news that's been thrown at it over the past couple of months. Therefore, traders who invest in the markets for more than 11 seconds at a time might just be invoking David Tepper's summer of 2010 game plan.

If you will recall Mr. Tepper said that stocks were a buy (in fact, he opined that "everything" was a buy) because if the economy worsened, the Fed would come in with more QE. And as we've learned, when the Fed starts buying bonds (IEI, IEF, TLT), the now famous "risk on" trade tends to go into effect immediately, which pushes stocks (SPY, DIA, QQQ, MDY, IWM), emerging markets (EEM), and commodities (especially gold – GLD and copper – JJC) higher. And what if the economy improves you ask? Well, as long as there is visible improvement in the economy, earnings would likely to improve as well - which, of course, would be a good thing for stocks.

The only scenario that could muck up the works is if things simply muddle along at what is currently being called "stall speed" in the economy. The thinking is that the Fed won't "come in" under this scenario. So, if the economy were to simply remain stagnant for any length of time, this could throw a bit of a monkey wrench into the "Tepper Trade." But given the impatience Mr. Bernanke appears to be exhibiting toward the rate of unemployment, my bet is that the Fed wouldn't sit on its hands for very long in this situation (as long as inflation remains low, of course).

So, while the HFT-Algos can and will do anything they darn well please on an hourly basis in the stock market, I'm of the mind that from a big-picture perspective, the path forward is fairly clear. So, if you agree, you will want to use market volatility to your advantage and take an opportunistic approach to the current stock market ride. Because while the path may be clear, the road is sure to be bumpy!

Follow Mr. Moenning on Twitter: @StateDave (Twitter is the new ticker tape)

For more on the State of the Market, visit

To take a free trial of Mr. Moenning’s Active Risk Management Strategy, go here:

Positions in stocks mentioned: SPY