Investors Shrug Off Risk And Go Back To Hopium

Stocks are rallying and investors are shrugging off the Fed again, despite the Fed announcing that inflation isn’t where they want it to be and a Fed governor saying risks are tipped more toward higher inflation than a weaker economy.  While they didn’t mention the risk of a rate hike, it still sounds like the Fed is trying to warn investors and investors don’t care.  

Let’s take a look at what that means for the markets for the rest of this week and beyond.

The major indices crossed over their widely followed 50-day moving averages as the bulls took over control.  The hope is that the recent weaker-than-expected jobs report is reason enough for the Fed to commence rate cuts sooner.  

Institutions follow the 50-day moving average and a move above that is seen as bullish momentum in the underlying.  We’re off to the races again, but the S&P 500 over 5000 is still optimistic when looking at earnings data and fundamental analysis.  

While investors are still counting on seeing rate cuts, I don’t think the Fed is likely to do anything that could be seen as interfering with the U.S. Presidential election coming up later this year.  That means inflation would need a major step in the right direction for any chance of a summer rate cut.  

The chances of a piece of economic data being that good for the inflation story without showing weakness in the overall economy are not that good.

Although the Fed is still signaling that hopium is ok and that a July or even September rate cut is still possible.

Where does that leave us?

While the U.S. market may not look great fundamentally(companies beating earnings, but lowering future forecasts), it’s still showing signs of bullish behavior on the technical pattern side, especially since we don’t have any major economic reports this week.  The existing trend is likely to continue.

If you’re wondering about the fundamental side, here are the S&P 500 multiples you should keep printed out by your trading setup.

There’s nothing wrong with trading at a 21x level (or higher), but it’s important to know that trading that high isn’t the historical average.  We can and probably will go higher from here, but be prepared for additional volatility and downside risk.  Remember, we still have several unknowns this year and the market gets skittish around unknowns.

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