One week ago the stock market look poised on the precipice of a significant breakdown. Here we are a week later and the major indices are all up +5% or more. There is plenty of speculation on whether this new rally is in anticipation of the Federal Reserve offering new stimulus this week or is it really hope that Europe is nearing some sort of solution on their debt contagion worries.
I seriously doubt investors are buying stocks on hope that Europe's problems are over (because they're not over). As a matter of fact, all the "positive" headlines regarding Europe and Greece this past week could have been smoke and mirrors and posturing while behind the scenes the major EU players are actually preparing for a Greek default.
Now we face a risk that the Federal Reserve Chairman Ben Bernanke might disappoint the markets with not enough stimulus in Wednesday's announcement. If market participants are disappointed then we could easily see stocks reverse course and head for their August lows.
I wouldn't be surprised to see a muted reaction to the FOMC announcement on Wednesday. Will we see some profit taking? Likely but it depends on what Bernanke says. We are only three weeks away from Q3 earnings season so there is a chance that stocks churn sideways until earnings begin. However, I am reluctant to launch new long-term bullish positions after a +5% rally in the market and the risk of a big disappointment on Wednesday.
No new trades tonight although we did add four new candidates to our watch list.