Making Money Alert: Is the Stealth Rally Out of Steam?

For the past six weeks, stocks have managed to mount what I call a “stealth rally,” meaning that there hasn’t been widespread participation from either individual investors or professional money. True, there is a bid on stocks here due to optimism over the possibility of more QE from the Fed, as well as a resolution to Europe’s fiscal mess from the upcoming European Central Bank meeting. However, I don’t think we can read too much into the sentiment here given the low volatility and small trading volume we’ve seen over the past several weeks.

One thing to take note of here is that after surging out of the gate to reach multi-year highs early in Tuesday’s session, stocks did an about-face and finally ended up in the red by the closing bell. This reversal of fortune could be a signal that stocks are finally running out of steam, and that the stealth rally we’ve had in July and August is finally starting to bog down.

As far as I could see, there was no real fundamental reason for the decline in stocks yesterday. We did, however, see a reversal of sorts in bellwether tech stock Apple (AAPL), which fell after rumors circulated that there may be a delay in the release of the highly anticipated Apple TV product. There were also rumblings that Apple wouldn’t be able to reach a settlement with rival Samsung over the two tech firms’ patent issues.

I think stocks are way overdue for a pause in the rally and/or a correction of some sort. The only caveat here is the Fed and the European Central Bank. Now, midway through today’s trading session, the FOMC released the minutes of its latest meeting. Here, we discovered that the Fed seriously discussed the possibility of more quantitative easing, and the initial reaction to this news was a bump in stocks.

After reading the minutes, there didn’t seem to be anything new in them. I think the better indicator of how things will progress with the Fed is the upcoming speech by Chairman Bernanke at the Jackson Hole central bankers’ conference. I suspect that if the Fed disappoints, the market could really run out of steam heading into election season.

Already, we’ve seen some pundits predicting a big pullback in the markets in the coming months. One market watcher calling for just such an outcome is Nomura strategist Bob Janjuah. In a research note published on Tuesday, Janjuah warned clients that the S&P 500 is likely to fall by 20-25% over the next three months.

Here’s the money quote from his research note:

“I now think the correct thing to do – as I also said in April and June – is to prepare for a serious risk-off phase between August and November…over the August to November period I am looking for the S&P 500 (^GSPC) to trade off down from around 1400…by 20 to 25 percent…to trade at or below the lows of 2011.”

If Janjuah is even half right, it would mean the end of the upside we’ve seen so far this year. It would also leave recent investors decidedly in the red. So, the moral of the story here is to proceed with extreme caution, especially if you are long in this market. A potential risk-off wave is liable to cancel the upside momentum we’ve seen in equities, and that is not good for those with heavy stock exposure.

Blind Faith Kills

“Blind faith in your leaders, or in anything, will get you killed.”

–Bruce Springsteen

The iconic rock musician reminds us that when you trust someone or something without question and without judgment, it can lead to destruction. This is certainly the case when it comes to money, as blind faith in a manager or advisor can lead you to make poor decisions in the face of the evidence. I recommend you always question any broker or advisor to make sure they have your best interests at heart, and to make sure your faith in them is justified based on the facts, as anything short of that can lead to your assets getting killed.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To the best within us,

Doug Fabian

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, going to DougFabian.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027879.