Market Update

Last week, I discussed the market's bullish breadth and continued risk-on confirmations juxtaposed with the bearish seasonal tendency for this time of year. I concluded, "if the S&P 500 does successfully get through the 1710 level, doing so meaningfully with some force, I would have to think such an occurrence would go a long way towards negating this seasonal headwind." Just hours after writing that sentence on Wednesday, the market did indeed forcefully soar to a new high, with the S&P 500 bursting through 1710 and almost reaching 1730 by Thursday. 

As shown in the daily chart below, the Index has since retreated back to prior resistance (now support) at about the 1700 level.

Source: Stockcharts.com

My frequent reminder: a pullback after a breakout is quite common and should not necessarily be perceived as bearish. In fact, as long as price holds at support, such action can be welcomed as it reenergizes the prior breakout move and sets up for a resumption of price climbing higher. Note also the S&P 500 met up with trend line resistance before retreating, and the volume spike could signal near-term capitulation (similar to the June occurrence). 

With this recent breakout, breadth measures remain bullish. The S&P 500's A/D line achieved a new high coincident with the Index, confirming the move higher. The Russell 2000 -- in itself a good measure of breadth -- continues to outperform the S&P 500:

Source: Stockcharts.com

Note that yesterday the Russell 2000 reached a new high versus the S&P 500, further indication of breadth remaining strong despite this recent pullback in the market.

A few words about last week's Fed announcement. The decision to taper talk of tapering was a pleasant surprise to investors, as evidenced by the market's run to new highs. While price inflation remains subdued, in large part due to a slowly improving yet underperforming economy, QE has worked to inflate the equity market. Keeping interest rates exceptionally low has not been enough to reinvigorate our economic engine, and yet the Fed believes without such continued stimulus we'd be much worse off. And judging by last week's response, investors appear to agree. 

Earnings have not been especially stellar so what QE has helped achieve is multiple expansion, which among other things is generally a reflection of sentiment and liquidity. Although economic conditions could be better, investors are less concerned when they have the Fed in their corner. The saying "don't fight the Fed" has seemingly been morphed into "do ride with the Fed," and what a ride it's been....