On Track For September Taper

As noted on July 15, our guess is the tapering dialogue at the Fed is more about escalating fears of another round of asset bubbles rather than confidence in the economy or fears about escalating inflation.

To help stem the bubble tide, the Fed may still announce some tapering at their September meeting. However, any tapering statement will most likely be accompanied by a pledge to support the economy with low rates for an extended period. A Bloomberg survey suggests a slight bias toward a change coming in September:

Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed's monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News. Half of economists held that view in the July 18-22 survey, up from 44 percent in last month's poll. Even as expectations of a September taper rose, 10-year Treasury yields continued to fall last week from an almost two-year high after Bernanke said reducing bond-buying wouldn't constitute policy-tightening.

A Picture Is Worth 1,000 Words

On Monday, we pointed out that the big picture from a technical and asset class perspective continues to side with the "more upside in stocks" camp. The weekly chart of the S&P 500 remains healthy (see chart A below). Long positions remain in established bullish trends relative to shorting (chart B). Stocks are trending relative to bonds (chart C). Similarly, credit spreads have a "risk-on" look (chart D).

Investment Implications

Charts A thru D above are all tracked by our market model. Other components of the model also align with taking a risk-on stance until we see observable evidence to the contrary. Mr. Livermore summed up the approach well on Twitter.

Unless something changes on the Fed, economic, earnings, or technical fronts, we will hold our broad U.S. positions (SPY) and leading sectors, such as small caps (IWM), financials (XLF), and technology (QQQ) through any "give back" that remains within the realm of normal.

Bulls Pulling For Emerging Markets

We would prefer to see the rally broaden out to other sectors and regions of the globe. Bulls would welcome a rally in emerging markets (EEM) with open arms. Early in Tuesday's session, EEM was up 0.84% on the heels of positive reports regarding Chinese stimulus. From Reuters:

World shares were propelled towards five-year highs on Tuesday by signs China was moving to avoid a hard landing for its slowing economy. Share markets worldwide gained after local media in China reported the government was looking to increase investment in railway projects as part of efforts aimed at ensuring annual economic growth does not sink below 7 percent.