Tuesday, January 18, 2011

Fed Leaves Big Tip

On Tuesday, the Federal Reserve purchased $1.74 billion in Treasury inflation-protected securities, otherwise known as TIPS, in an outright purchase as part of the $600+ billion QE2 program. The extra gobs of money created a nifty rise in securities - doesn't it always? - as the major stock indices rose to new highs. It is looking like January will see a positive "January Effect," a term that will be bandied about over the next two weeks if the markets are able to hold onto the gains made thus far or improve upon them.

The January Effect, as it is known to traders, is the theoretical assumption that as the markets go in January, so will they go the remainder of the year. This gauge is supposedly right something along the lines of 85% of the time if January is positive. Over the past two years - both of which saw falling equity prices - the "effect" was not seen, as both 2009 and 2010 turned in impressive upside performances.

While it might not correlate to downside Januaries, two consecutive years of non-conformation raises the issue of whether Fed meddling has rendered all "old" measures of anticipated returns nil. With this January off like gangbusters, what is the chance of ending the year lower? Well, we've got 11 more months to find out, but, if the Fed continues its inflationary policies, stocks will most likely end the year higher, if only to keep pace with the "moderate" inflation, which could turn into "unwieldy" in the second half of the year or sooner.

Wall Street is certainly having its way on the easy money train of late, and while it's probably not too late to jump on the bandwagon for some quick-turn profits, there still is considerable risk, even though nobody will admit to it.

Upward we go, as earnings this week will flow like mother's milk.

Dow 11,837.93, +50.55 (0.43%)
NASDAQ 2,765.85, +10.55 (0.38%)
S&P 500 1,295.02, +1.78 (0.14%)
NYSE Composite 8,190.91, +16.79 (0.21%)

Considering today's gains, the A/D line did not come in heavily on the side of advancers, which nonetheless beat decliners, 3464-3073. On the NASDAQ, new highs overwhelmed new lows, 269-12. On the NYSE, the beat was not quite as robust, with new highs checking in at 304, against 47 new lows. Volume was fairly strong, but not solid enough from which to draw any conclusions about future direction.

NASDAQ Volume 2,032,031,375
NYSE Volume 5,828,719,500

The front-end (February) crude oil contract on the NYMEX was nearly flat, losing 16 cents, to $91.38. Oil remains at elevated levels. Gold rebounded from last week's drubbing, picking up $7.70, to $1,368.20, with silver adding 58 cents, to $28.91.

There doesn't seem to be any downside to buying equities these days. Even in the case of Apple (APPL), where founder and CEO Steve Jobs announced a six-month medical leave of absence, the stock fell more than 7 points during the session, but recovered back most of that in after-hours trading as the company posted numbers in excess of Street estimates. IBM also reported and beat, while Citigroup announced a 50% miss (.04 cents on expectations of .08) prior to the opening bell.

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