An early rally fizzled yesterday as the markets realized that two stimulus programs are coming to an end. The “Cash for Clunkers” program ended late Monday while the “Cash for Shelter” plan is still scheduled to run until November 30th. That program provides tax credits for home purchases.
Of course, stimulus is nothing more than robbing Peter to pay Paul, which is a different way of saying that future sales have been brought forward. This brings up the question how the markets will behave when stimulus is no longer used to elevate economic results.
One strategist evaluated recent market behavior this way:
Recent market gains haven’t led to a lasting pullback, despite data last week that showed a weaker consumer and a rattled China. But the market is as emotional as it is rational, says Jeffrey Saut, chief investment strategist at Raymond James.
“Indeed, fear, hope and greed (are) only loosely connected to the business cycle,” he wrote in a note to investors. “And, at session 30 in the ‘buying stampede,’ we are clearly in the ‘greed phase.’ We continue to invest, and trade accordingly.”
What that simply means is that you need to be prepared for a directional change in the trend whenever it occurs. Those without a plan to exit the market will very likely get broadsided – again.