Federal Reserve Chairman Ben Bernanke is officially testifying to the House Financial Services Committee today but his real audience is the market. Bernanke's main point is what most already suspected: Don't expect this stagnant economy to turnaround anytime soon. Bernanke is acknowledging stimulus efforts to date haven't worked and he's not sure what he's going to do about it. It's a disturbing message and yet stocks are rallying strongly. It's easy to dismiss a stock market rally in the face of such a dour outlook as "silly" or even "dumb". It's also absolutely wrong. When markets rally on bad news stocks are speaking to investors. For smart traders it literally pays to listen.
Here's what stocks are telling you today:
Stimulus is Bullish. The S&P500 is up about 25% since the start of the delightfully named Quantitative Easing. There may be no QE3 in our near-term future but stimulus by any other name is still bullish, as far as the market is concerned. Grousing about "pushing on a string", "moral hazard" or the long-term danger of Helicopter Ben's policy will get you no where as a stock picker. Stimulus is good for stocks, at least for now. Deal with it.
Traders love being spoken to like adults. Bernanke's predecessor, the Yoda-esque Alan Greenspan made a career out of obfuscation. "I've practiced that thing of not responding for several decades," Greenspan once proudly told us, "I hope I've got it down". Bernanke tells us what's what. He tells us when he's worried about growth and doing his best. Investors are grown-ups. When the economy hits the fan market participants want to get the bad news straight. "With the bark on it," as FDR used to say. Traders who survived the Internet and Housing bubbles don't believe in hope or magic. For all his flaws Bernanke gives us reality. That's incrementally bullish.
Stocks are Resilient, not Complacent. Markets are "a little bit Rocky-ish" says Philadelphia-based Breakout guest Gene Peroni of Advisors Asset Management. He notes that the tape is holding up in the face of "the punches from the headline news." Not ignoring the headlines and not whistling in the graveyard. Stocks aren't making all-time highs, they're hanging tough. There's a big difference. Peroni says "formations technically in many stocks and many sectors look very attractive" suggesting that stocks are "not vulnerable to a single event." Given the pummeling we've gotten on the front page of the papers lately it's hard to argue his point.
The Fed has Our Back versus DC. Bernanke is scolding lawmakers for playing with fire. He's gently but firmly placing the blame for small business' lack of confidence at the feet of the Obama Administration. His point is that it's hard to make hiring decisions when companies don't know what their expenses are going to be. Traders hate the ongoing debt ceiling debate the way kids hate earaches. It's nice to have someone in the halls of Washington sharing our view.
The Consumer is Alive. The rally is being led by consumer stocks. Retailers are ripping, health care is sickly. It may be news to the 9.2% of Americans without jobs, but Wall Street is betting Americans will still be shopping, at least a little bit. "Consumer discretionary is one of the best performing groups," says Peroni, "the consumer, at least according to the market, is still alive."
You can disagree with all of the above but you do so at your own peril. The "smarts" have been shorting this tape since 2009 and increased their bearish bets with the release of the Fed's QE program. Bernanke gives us "tough love" making him less of a beloved cult figure than Greenspan was. But traders don't want a sweet-natured grandpa at the helm of the Federal Reserve. We want a no nonsense smart guy doing his best.
Hate it though the bears might, the reality is this: Stocks want hands-on involvement from Bernanke's Federal Reserve. That, not lunacy, is what makes stocks go higher when the Chairman speaks.