Tapering Is Base Case, But...

The Fed's tea leaves still infer the base case is some form of tapering to their bond buying campaign in September.

However, if economic data continues to land in the less-than-impressive zone, the Fed could surprise the markets with a "no change announcement". From Monday's Wall Street Journal:

The long-anticipated acceleration in the U.S. economy has been put on hold once again. Disappointing economic and corporate-earnings reports in recent weeks have dashed hopes that the U.S. was at last entering a phase of solid, self-sustaining growth. Instead, while economists expect a modest second-half pickup in growth, few are predicting the kind of substantial rebound needed to quickly bring down unemployment, raise wages and insulate the U.S. from economic threats abroad.

Asset Classes Still Favor Bulls

As outlined in this week's video, the big picture from a technical and asset class perspective continues to side with the "more upside in stocks" camp. Stocks continue to outperform bonds. Long positions remain in established bullish trends relative to shorting. Similarly, as of last Friday's close, credit spreads have a "risk-on" look. The previous three sentences tell us something has to change for the stock bears.

Japan and G-20 Hint At More Stimulus

Last week we outlined how the Fed is trying to create sustainable demand for risk assets (stocks, housing). Monetary stimulus helps drive asset prices higher, which in turn brings those seeking profits off the sidelines. Over the weekend, news from Japan and the G-20 Summit hinted at an ongoing global campaign of money printing and bond buying. From Reuters:

World shares were within sight of a five-year high on Monday as a strengthening of Japanese Prime Minister Shinzo Abe's grip on power in weekend elections was seen as a boost for his radical stimulus policies. The mood was also bolstered by a pledge from the Group of 20 nations on Saturday to adjust their stimulus policies with care and put growth before austerity in order to revive the global economy, which the bloc stressed remained "too weak".

Investment Implications

As noted above, something has to change for the stock bears. Therefore, until an observable bearish shift occurs, we will continue to hold our broad U.S. positions (SPY), and those in financials (XLF), energy (PBW), small caps (IWM), and technology (QQQ). One piece of evidence that continues to support higher equity prices is the breakout from the 13-year base shown below.

Levels To Watch

From a weekly perspective, the broader NYSE Composite Index joined the S&P 500, NASDAQ, and Dow by recording a new closing high. As long as these bullish breakouts hold, it is relatively easy to maintain a bullish stance.

The weekly figures to watch are 9,576 on the NYSE, 1,667 on the S&P 500, 3,498 on the NASDAQ, and 15,354 on the Dow. If the indexes experience a weekly close below the levels above, it would increase the odds of renewed weakness in stocks, or a period of consolidation.