Market's Reaction Key For Stocks, Bonds, & Gold

If you were wondering why the financial markets were trading in a tentative range for most of Monday's session, the tweet below provides the answer.

Taper Or Low Rates?

If the market is looking for a shift on the taper front Tuesday, it may be disappointed. From John Hilsenrath of The Wall Street Journal:

Federal Reserve officials don't appear inclined to alter the course they have set out for monetary policy, despite a disappointing jobs report Friday that raised questions about the economy's underlying strength. Central bank officials are on a path to reduce their monthly bond buying by $10 billion at coming policy meetings. At their meeting in late January, they lowered the purchases by that amount to $65 billion and will consider cutting them to $55 billion at their next meeting March 18-19.

If the market is only looking for a pledge to keep interest rates low, it may be quite pleased. From Yahoo! Finance:

All of Wall Street will be watching new Federal Reserve Chair Janet Yellen when she delivers her first testimony as Fed chair before Congress this week. Cumberland Advisors Chairman and Chief Investment Officer, David Kotok, told Breakout there was nothing in the latest employment report to derail Federal Reserve policy. "The employment report was right in the middle. You don't panic over it. You don't get excited about it." Kotok said he expects Yellen will emphasize that the Federal Reserve will not come off low interest rates. "This Fed is not about to take a fragile economic recovery and toss it over the cliff," said Kotok. "They won't do it. Yellen won't do it. The majority of the FOMC won't do it."

Stocks: Improvement, But Hurdles Remain

Last Friday, we noted some observable improvement in the market's tolerance for risk. This week's stock market video answers the question, "how much improvement took place last week?"

Fed Policy To Remain On Its Current Course?

Most market observers do not anticipate any meaningful shift from the Fed based on last week's tepid report on the state of the labor market. From Bloomberg:

"When Fed Chair Janet Yellen delivers the monetary policy report to the House, she will surely indicate that the economy remains fragile, but is growing," Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a note today. "Policy is set to remain on its current course."

If the Fed were to stay on its current course that would point to additional tapering in the months ahead coupled with a pledge to keep interest rates low until economic conditions improve materially.

Current Course Still Producing A Concerning Look

If the Fed does not signal any material changes to the market Tuesday, we can reasonably expect more of the same. How has the market reacted to current conditions? The answer is "in a somewhat concerning manner". As of Monday afternoon, the weekly chart of the S&P 500 below continued to maintain a corrective look similar to points A and B below.

Investment Implications - Market Will Dictate Our Next Move

If last week's rally in risk assets can continue and the chart above can move to a "risk-on" rather than "risk-off" stance, we will consider taking another incremental step to increase our exposure to stocks. The daily chart of the S&P 500 below has three still-relevant trendlines. If bullish conviction is strong enough to push the S&P 500 above lines A, B, and C, it will put another feather in the current rally attempt's cap.

The tweets below speak to the need for a still balanced allocation heading into Tuesday's onslaught of Fed speakers.

Until the market places a more convincing and sustained bid behind stocks, bonds, or precious metals, we will continue to hold a mix of stocks (SPY), technology (QQQ), bonds (TLT), and cash.