The market was decidedly in "risk on" mode today after good economic data was released and Ben Bernanke reiterated his commitment to Quantitative Easing (QE) until the unemployment rate dropped. The uptrend in equities since March 2009 has remain intact, and bullish sentiment is still not at extreme levels. With the distance we are away from all time highs in the Dow Jones and S&P 500, we think the most likely scenario is a break to all time highs. This should trip a lot of stop limits, buy stops, and bring in more money off the sidelines. At some point there will be a correction; but unless the issue is serious enough to create the beginning of a multi-year downtrend, it will most likely be a dip, providing a good buying opportunity.
The main reason the U.S. stock market has been so well bid over the last couple of years has been QE - and Bernanke reaffirming his commitment to easing gives the bulls a green light to continuing buying. That's what matters more then the "economic realities" bears claim exist. Maybe they are right; but it doesn't matter. When it comes to the markets, price is the only reality there is.
To the FX market: there's been a notable divergence, as the U.S. Dollar Index has remained well bid in the month of February, even as equity markets have pushed higher. There are two possibilities: either the correlation between risk on/off and the U.S. Dollar is breaking down, or the break in the correlation is only temporary in which case the equity markets will soon rip down or the USD will weaken substantially. This question may be answered this Friday (March 1st) when President Obama's sequestration is scheduled to go into effect.
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