The Extended Period Extends

Bulls got their Christmas wish today as the Fed stood just about completely pat, as we expected they would. They reconfirmed that they will sunset some liquidity programs, but these plans were telegraphed to the market months ago. The wind down of some of these programs is actually the first step in the removal of accommodation but thus far the Fed has not given any hints about when they will go further.

The market closed poorly but reaction immediately after Fed announcements is often best ignored. The market usually takes at least overnight to digest the Fed action and accompanying statement. Without anything significantly different we believe it will be treated as a non-event.

What we’re most impressed with is that the market, while still in basing mode, has actually already subtly started another leg higher. New leadership has started to assert itself, which often happens in advance of the market itself breaking authoritatively to new highs.

HMO’s have moved nicely higher as it has become apparent that whatever healthcare plan comes out of congress will avoid any serious damage to their business models. While these stocks could lead we’re more taken with the emergence of cyclical groups like chips and airlines.

Indeed the Philadelphia Semiconductor Index ($SOX) and the Dow Transports ($DJIT) have already moved to fresh recovery highs. This is significant because these groups tend to outperform early in an economic recovery. In other words, the market is increasingly convinced that the recovery is real. We’ve repeatedly discussed the likelihood of this paradigm shift and we’re seeing it confirmed in real time as investors seek out those sectors that are likely to benefit as the economy continues to improve.

With new leadership beginning to assert itself, and with smaller cap stocks starting to outperform again after lagging badly during the recent market basing period, we continue to believe it is only a matter of time before the market begins another leg higher.