Changing Stock Market Fundamentals

With the decision by the Fed to raise short term rates by 25 basis points, the "easy money buy"
rating I have had in effect since very late 2008 has ended. With primary fundamentals now
negative I have a "tight money sell" now in place. The stock market can rise from here, but it
is no longer rated attractive as an investment but only as an occasional trade. This is only my
preference and others will surely disagree. Primary liquidity measures, the direction of interest
rates and measures of financial market confidence are all negative. I also flag the Fed view
expressed today that as short rates reach 'normal' levels, the Fed will consider selling or allowing
securities held on its balance sheet to run off. That possibility, although may be sound in theory,
has proven disastrous in practice.

Whatever the return potential for stocks may be going forward, stock market risk is now substantial
and rising.

I do follow a group of indicators I regard as secondary and it is a mixed bag at present. The positives
represented are no evolving liquidity squeeze in place, ample private sector credit driven liquidity
relative to the present needs of the real economy, and modest levels of 'sideline' cash reserves. The
negatives are obvious -- an ongoing earnings recession and the high level of valuation.

The upshot here is that the future direction of the stock market is now much more difficult to
predict.

There are a couple of more important factors here.  One is 'career risk'. It has been a lengthy
bull market, the economy is just muddling along, and stocks are expensive. There may be
a number of players out there who have all manner of reservations about the market outlook.
However, if positive price momentum develops and seems like it may have staying power,
many players will hang in there because they do not want to lose clients and their jobs.
Also, in a rising interest rate environment, investors may be inclined to move a portion of
assets out of bonds and into stocks. Finally, we will have to keep an eye on the oil price,
as extreme developments there can challenge the market.