Rev's Forum: Sorry, Bears, but Yellen Dashed Your Hopes Again

 | Jul 17, 2017 | 8:17 AM EDT
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The Fed has been ratcheting up its hawkish rhetoric lately, and the market has been starting to take notice. Last week, however, Federal Reserve Chairwoman Janet Yellen threw the bulls a bone in her testimony in front of the House Financial Services Committee. Without giving many details, she hinted that fiscal policy uncertainty and below-target inflation could influence the speed with which the Fed further raises the fed funds rates.

The bears have been insisting for years that the unwinding of the Fed's extraordinary monetary stimulus would be this market's undoing, and over the past few weeks the market has been struggling with the "balance sheet normalization" narrative. The bulls celebrated Yellen's backpedaling, as equities, bonds and precious metals traded higher in response.

This was last Wednesday, and if you've been paying close attention to the action lately, you've likely noticed that neither bulls nor bears have had much luck generating follow-through for a while now. Much to the chagrin of market participants everywhere, the action has been rather choppy as sector leadership has been shifting faster than alliances in the Game of Thrones. The bears suggested that this was a sign of instability under the surface, and with the market heading into what historically has been the roughest patch of the year, their warnings of imminent doom have grown all the louder.

However, that changed as the week wore on. After some modest follow-through on Thursday, the indices accelerated higher on Friday as earnings season got under way. Citigroup Inc. (C) , JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) each reported solid numbers, but interestingly enough, it wasn't the banks that drove the upside. That group saw a classic sell-the-news reaction after its strong upside run in late June. But, instead of pressuring the rest of the market, money rotated back into other groups, which in turn pushed both the S&P 500 and Dow Jones Industrial Average to fresh record highs by the close on Friday.

In addition, market stats the second half of the week suggested broad-based buying, which is something that was notably absent in April and May when a small group of tech names dominated the action. On Friday, there were about 300 stocks hitting fresh 52-week highs versus 30 hitting new lows, suggesting that there has been some renewed momentum in individual stocks.

We'll see if the bulls can keep it up as earnings reports come flooding in this week. The bears will continue to focus on the continuous distractions out of Washington, and frankly, the market has shown remarkable patience as it has waited for any hint of progress toward fiscal reform. It's hard not to wonder if that patience will run out or if other sectors will see the same sort of sell-the-news reaction like the banks did. For now, though, the indices are sitting at record highs and the troops are looking for some early follow-through as we head toward the open.

(This article was written by Jim Koford.)

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