Rev's Forum: Did Janet Yellen Put the Momentum Train Back on Track?

 | Jul 13, 2017 | 7:14 AM EDT
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"We're watching this very closely and stand ready to adjust our policy if it appears the inflation under-shoot will be persistent."

-- Janet Yellen, speaking before Congress on July 12

Janet Yellen gave the market a boost on Wednesday with some less-hawkish comments about the Federal Reserve's plans. She hinted that rates may not rise as fast as previously signaled because of the uncertainty of fiscal policy and because inflation remains contained.

The market, which has been struggling with hints of less accommodation from central banks around the world, celebrated this kinder and gentler approach. Equities, bonds and precious metals traded higher as the dollar dropped.

The question now is whether the market will build on this action. Recent market rallies have fizzled out quickly as concerns about interest rates have reoccurred quickly. The market has dealt well with delays in the Trump fiscal agenda, but when that was combined with the potential for higher interest rates it created a headwind.

The Dow Jones Industrial Average was the only major index to hit new highs yesterday, but the strength put the others in good technical position for a challenge of all-time highs. The S&P 500 broke a short downtrend and is within a stone's throw of the June highs. The Nasdaq is on a four-day winning streak and has had the strongest action recently. The Russell 2000 lagged yesterday but has a promising W-pattern to provide support.

Technically, the indices look pretty good and the expansion of new 12-month highs to around 435 indicates that there is some good momentum in individual stocks. New highs were about a quarter of that amount a few days ago, so there are signs that some chasing is taking place again.

The thing that has plagued the market over the past month and given the bears some ammunition is the choppiness of the action. The last four big days like yesterday saw reversals the following day. Neither bulls nor bears have generated much momentum lately, but the bulls are now in position to press their advantage and show they are still in control.

One thing that favors the bulls at this point is that earnings season starts soon. There are three large banks reporting Friday morning, and then reports start to roll out in earnest next week. Expectations don't seem particularly high, and the market has had a tendency to celebrate earnings in recent years. The banks tomorrow will help to set the tone for the next few weeks.

The bears will continue to growl about the chaotic political situation, but the market has shown it simply doesn't care about the Donald Trump show. The market wants fiscal reform to move along, but is showing some remarkable patience. That could change, but with a more dovish Fed it isn't too big of a problem right now.

We have a mild start to the day as market players wonder if the pattern of quick reversals will continue or if the bulls finally will put the momentum train back on track.

I am heading out later today for vacation. My 12-year-old son is playing a week-long baseball tournament at the Dream Park at the Hall of Fame in Cooperstown, N.Y. It should be a fun event and I'll be checking in when I have a chance.

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