Stocks are on quite a roll as 2012 gets underway. The S&P 500 is up more than 5% already — it’s on an annualized pace of 130% — which is its best start since 1997, according to Bloomberg. And stocks received a further lift yesterday afternoon following the latest Federal Reserve meeting. The Fed extended its pledge to keep short-term rates at record low levels for a year and a half longer than previously promised (late 2014 instead of mid-2013). In addition, in his Q&A with reporters after the meeting, Chairman Bernanke said that more quantitative easing (QE) is “an option that is certainly on the table.”
Ironically, the fact that the market is raging higher and the economy has been marginally improving would seem to work against the case for more QE. With the Fed’s ammunition running lower these days, we’ve been of the belief that the economy and markets would have to be cratering again in order for the Fed to unleash a new round of asset purchases. After all, if they implement more QE now when it doesn’t seem necessary, if things worsen down the road, they’ll have fewer resources to help stem the tide.
In any event, it’s tempting to hop aboard the risk-on train as it picks up steam, especially as signs of confidence and optimism begin to emerge again. However, the S&P 500 is now less than 3% from last April’s high of 1363, where it could find some resistance. And some shorter-term technical measures are indicating that the market is now overbought. So at least in the short-term, it’s probably best to exercise caution.