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Fed Comments Push Market to Ever Higher Ground

Stock markets around the world are up big today on statements from the President of the St Louis Federal Reserve Bank that the Fed will likely extend the program of buying mortgage backed securities past the March 2010 expiration date.

sp-500-today

Investors have interpreted this comment to mean more printing of dollars and more a further extension of the rally in the stock market.

This news came on top of comments from the Bank of Canada and the International Monetary Fund that the policy of fighting deflation (ie, easy money) would continue and that its better to be too late than too early in ending the fight.

Watch for Gold and Basic Materials to continue their march higher and the dollar to continue to be weak (although there will ALWAYS be temporary reversals within the major trends. Just look at the dollar chart below:

usd

You can see that since May, the 34-day moving average -the red line – has acted as the upper boundary of any temporary reversal (we see it happening right now, but this current rally has not made it up to that boundary yet – and may in fact resume the downtrend based upon these central bank comments).

You get the picture – easy money with no place to go but into the investment markets will continue to act as a catalyst until either the real economy picks up enough that it can absorb the liquidity into productive GDP enhancing activities OR until the Fed shuts off the liquidity spigot. I don’t see the former happening to a significant degree anytime soon and the Fed’s own comments discount the latter.

So, our plan continues – ride the market to higher ground but protect against a fall.

Mark