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Sep 15, 2012, 02.35 PM IST
Comparing the Federal Reserve to a rehab clinic offering addicted investors a synthetic high has been a favorite of Wall Street wags ever since the first round of Fed stimulus nearly four years ago.
After the frenetic reaction brought about by the announcement of the Fed's latest stimulus program - USD 40 billion pumped into the US economy each month - the coming week is likely to bring a more sober period for markets as investors digest what it means in the longer run and turn their attention to the remainder of the year.
That will include rancorous US elections in November, wrangling over taxes and spending cuts and a slowdown in corporate earnings.
"Right now we have this short-term euphoria. But then the question is where do we go from here," said Frank Fantozzi, chief executive of Planned Financial Services, an independent wealth manager in Cleveland. "I think after a week or so, if the underlying economic data doesn't change, you're going to see the market drop a bit and we'll continue to plod along until the election."
The effect on markets of the European Central Bank's plan to buy government bonds of struggling euro zone countries, then the Fed's opened-ended commitment to spur growth have been breathtaking. The Dow and the S&P 500 reached the highest closing level in nearly five years while the Nasdaq marched to new 12-year highs.
But in Friday's stock market action strong gains in the morning steadily eroded throughout the day, perhaps the first signs of fatigue creeping into the market.
"We are starting to get into that heady territory where you need to be on the defensive," said Richard Ross, global technical strategist at Aubach Grayson in New York. "Trying to squeak out the last 5% of a move when there is potentially a 15 to 20% downside in my opinion is pretty dangerous stuff."
Ross believes that equities, commodities and currencies are now approaching extreme levels of both price and momentum while geopolitical tensions in the Middle East are rising.
Even though all the major stock market rallies since the financial crisis have coincided with new central bank efforts to stimulate the economy, not everyone is buying it.
The latest data shows a moderate increase in short interest - bets that stocks will fall - across S&P 500 stocks during the last two weeks of August, a period when stocks were rallying on expectations of the Fed's announcement. Typically short interest inversely tracks the market. If investors were getting out of bets that stocks will fall, that would mean buying back those stocks and forcing the market higher.
Data provided by Schaeffer's Investment Research, a Cincinnati-based research firm, shows that bets against the biggest 500 US companies edged back to about 7.3 billion shares after falling from about 7.6 billion to 7.2 billion from the start of July through the end of August - a period when the market gained more than 3%.
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