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State of the Markets: Have doves, will travel

Yesterday’s stock market action once again reinforced the idea that the key driver of this market remains the outlook for monetary policy. With the S&P 500 looking it was down for the count and ready to break the all-important support at 1980, traders got word that the Chinese leader Xi Jinping was considering replacing the head of the PBoC. The immediate thinking was that such a move would liberalize monetary policy in the world’s second most important economy and that more stimulus would likely ensue.

In addition, “Super Mario” (ECB President Mario Draghi) also lent the bulls a hand by saying that (a) monetary policy would remain accommodative for a very long time, (b) that the ECB was united in their view that inflation needs to return to the 2% annualized target range, and (c) that governments need to do more to boost growth.

Finally on the monetary front, there was more talk about the Fed needing to be patient in terms of its plan to tighten rates. For example, Chicago Fed’s Evans said the Fed should be “exceptionally patient” and willing to allow modest overshooting of inflation target. NY Fed President Dudley also argued economy needs to run “a little hot” for a while. In addition, both referenced the Fed’s premature tightening during the Great Depression. And then Minneapolis Fed President Kocherlakota said inflation likely to remain below 2% target for next four years.

On the economic front, New Home Sales surged in the month of August. This put a dent in the bear camp’s worry that the housing market was slowing faster than anticipated and would soon become a drag on the economy. In addition, the new “Inversion Rules” from the Treasury department did not appear to be as harsh as had been feared and would not deter deals in the future.

Now toss in the fact that the market had been down for 3 consecutive days, which, for the past two years has been a buy signal for the fast money crowd, and boom – the rally was on.

Turning to this morning, things were fairly quiet overnight. European markets are mostly higher as traders continue to focus on Draghi’s dovish stance. In Asia, the Nikkei went on a tear and finished at new seven-year highs. And here at home, U.S. futures point to a slightly lower open at the present time.

Current Market Outlook

By now it is quite clear that monetary stimulus remains the focal point of the market. In short, any mention of anything that could possibly delay rate hikes in the U.S. or add to stimulus measures in Europe/China is viewed as a positive by traders and their computers. However, it is important to keep in mind that this market is not hitting on all cylinders at the present time. As such a cautious stance remains warranted.

Looking At The Charts

The good news is that the S&P 500 stopped declining at the exact spot that it needed to yesterday. The fact that the 1980 level held during the opening round of selling caused traders to “go the other way” from a technical standpoint. However, the bad news is that stocks remains stuck in a trading range. And with stocks no longer oversold, it is anybody’s ball game at this point. We will continue to focus on the key lines in the sand on the chart of the S&P 500, which by now are very well defined.

S&P 500 – Daily

See more at: StateoftheMarkets.com

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.