During a speech today at The Economic Club in New York, Federal Reserve Chairwoman Janet Yellen stated that the central bank would now have a cautious approach to raising interest rates based on the current uncertainty of global markets. She also revealed that the Fed could rely on bond purchases (more QE?) if the economy stumbles. These comments are reinforcing the recent dovish decision by the Fed to raise interest rates only two times this year instead of four and show the Fed's strong determination to keep equity markets buoyant. Markets are responding strongly to Ms. Yellen's speech, but it is too early to tell if these are serious moves or just knee-jerk reactions to her dovish coos. Not surprisingly, Yellen's dovish tone sent stock markets up and the U.S. dollar down. The precious metals and crude oil (we just unloaded our short position in crude - see below) are also up in reaction to the falling dollar. I was expecting a bounce in gold and silver this week, but not a serious one. These surges may just be a "flash in the pan". We will have to wait and see. Holding my short positions in gold and silver for now.
The broad stock market is looking very much like it wants to roll over and take some sort of correction. Based on medium-term cycle patterns, the DOW is especially vulnerable right now to a steep (but short-term) drop. Can Yellen's dovish overtures override any corrective forces and kick the markets higher? Maybe, but note (as I mentioned in yesterday's blog) that COT charts show that Commercial traders (the "smart" money) liquidated all their long positions in the S&P 500 last week so we shouldn't bet on a strong rally here. Perhaps the Fed (Yellen) realizes that a correction is due and is just trying to minimize it. If all three market indices (DOW, S&P 500, and NASDAQ) break above last week's highs this week then this market could rally for another three or four weeks. On the other hand, if only one or two indices make(s) a new high (but not all three) then we may have a case of intermarket bearish divergence and a strong signal to sell short for at least a short-term (but possibly steep) correction. Still on the sidelines of the broad stock market.