If you follow the market every day, as I do, you can observe two distinct groups of bullish investors. This is hard to depict on a chart, but I am going to try. One group responds normally to economic news, selling when the news is bad. The other group buys on bad news, anticipating monetary stimulus from the Fed.
One way to spot this behavior is to discount market movements according to changes in the dollar. The S&P 500 has rebounded in February, while UUP has fallen steadily. Investors move to GLD as an inflation hedge, and that chart shows the same thing.
Another way is to compare the market to some gauge of economic health. Below, we see that the ECRI weekly leading index peaked in early January. This is a little fuzzier than seeing the market react day by day, but you get the idea. Bulls in today’s market are buying QE.
For several weeks around Christmas, the “recovery” meme held sway. The market correction on Jan. 23 was caused by this group losing faith. The bounce that began on Feb. 4 was part of a normal corrective pattern that could be attributed to either group. Following Janet Yellen’s testimony on Feb. 11, however, the QE bulls are back in charge.
The new Chairperson said she would continue the former policy of winding down QE, but the market did not believe her. This is probably because of her shift from unemployment statistics to direct targeting of inflation. Observers interpreted this as an opening for slower tapering, if not an outright reversal.