Looking back at the market over the course of the past few weeks we have seen the following: A fervent rally in equities, a rally in precious metals, a rally in bonds (interest rates lower), and a sell off in the dollar. Looking at this landscape from 30,000 feet, I say to myself, "one is not like the other, and something has to give". In my opinion it will be equities that lose in the end, as Adam Smith's "invisible hand" will eventually bring them back in sync with the current dynamics of the market.
Currently the E-mini S&P 500 future for December delivery sits at 1762, up three points on the day, and more than 100 points higher than the lows experienced in the contract during the height of the debt negotiations on Capitol Hill. This rally has come on the heels of weak economic data, such as the September jobs report and consumer confidence, as well as an earnings season that has thus far been fairly strong, however followed by downbeat language for Q4 projections.
I tend to believe that the negative Q4 outlook by corporate America is the key takeaway this earnings season, as it implies a cloud of uncertainty remains at the forefront of the minds of those who ultimately drive our economy. This uncertainty revolves around the pending debt negotiations that we will once again come face to face with in early 2014, the uncertainty around when the Federal Reserve will scale back its quantitative easing program and general uncertainty around our ability as a country to escape this anemic sub 2% growth cycle that we are in. With such doubts, it is unlikely that we see many companies looking to significantly ramp up operations in the final three months of the year.
Having said that, our trading desk remains extremely cautious with the broader market. Probably more so than we have been at any other point in time during this run-up in the S&P since 2009. While Q3 earnings have been an upside surprise, it is my belief that this market is less concerned with fundamentals and remains infatuated with the easy money policies of the Fed. While this has created a nice wave to ride, corporate America is pointing to an uncertain future. And uncertainty never bodes well for the broader market.