Don't Fight the Tape - Don't Fight the Fed

In my last post I laid out a road map of how to play this market. Since that post, several of the negative factors that I listed have turned positive.  I have therefore let the stock market lead me into a more bullish construct. Here are some of the new positive factors:

1 - The Fed has symbolically raised the discount rate by a token amount and told the market that it will eventually raise rates. At the same time, the Fed indicated that their easy money policy will remain intact for quite some time. As a consequence the yield curve has steepened and the market knows that it has clear sailing for several months.

2 - Despite his apparent intransigence regarding his health care plan, President Obama and Congress have been forced to back down on their deficit building plans.
The Democrats may go down kicking and screaming, but the nation is not going to permit their left wing high spending agenda to pass. Also, the President's bank bashing has subsided. Finally, the country realizes that the Volker Plan is not a take it or leave it one dimensional cartoon. Rather, the country realizes that it is a sophisticated basis for negotiating a new set of rules for banking and risk taking.

3 - The tape has gotten stronger and market leaders such as AAPL, PCLN, CMG, etc., have broken to new highs.

The stock market is always reacting to evolving circumstances. Therefore, one should have an ongoing general thesis from which to play one's hand. By being flexible and not fighting the Fed or the Tape, one can adjust accordingly.

I believe that in this economic environment, one can not be a Nostradamus and predict where the market will be one to five years from now.  We are not in the bull market of the 1980s and 1990s anymore. Rather we are in post economic crash 2010. As our Nation searches for a new direction, I believe that it will take some time before a new secular bull market begins. Instead we will witness many cyclical bull and bear markets within a trading range below the market's all time highs.

America is going through a process to find its way again. In my opinion, the following issues that must be addressed before we get back on track:

1 - We have to get our house in order by eliminating the budget deficit. This includes changing our personal economic behavior from consuming to saving.

2 - We must rebuild our eroding infrastructure of roads, bridges, railroads, and internet delivery. We are falling behind the emerging economies of the world in this area.

3 - Our pre university education system must be revamped to keep up with the rest of the world. In addition our immigration policy must work towards keeping the foreign students -who avail themselves of our great universities - in America. If we are going to teach them, we should incentivise them to work and stay here instead of allowing them to take our intellectual property elsewhere.

4 - Congress has to be changed. Our legislative system is antiquated and needs to be fixed. I'm not saying to junk the constitution and the balance of powers. I am saying that we have to come up with practical solutions to break the Congressional logjam and stop the non stop campaigning and food fight between the parties. As I have said before, our founders wanted change to be difficult. That is OK, but grinding to a complete legislative halt during a 21st century flat world light speed internet era does not cut it.

5 - America has always been a country motivated by exploration into new worlds and horizens - from "go west young man' to JFK's space program. We must  regain our leadership in space exploration. JFK understood the need for being number one in space. President Obama's attempt to scuttle the space program in near sighted and foolish. He does understand what makes America tick. The space program is good business. Most of the scientific discoveries that we use in our every day lives came from the space program.

6 - Becoming energy self sufficient is priority number one. Green energy is good business. Therefore, whatever side of the global warming issue one believes in is not important. Even a five year old can see that there is a finite amount of fossil fuels and that carbon emissions are bad for the planet. If we don't want to depend on OPEC for energy, we have to come up with a full fledged energy program.

7 - We must ensure that we stay the world's leading economy and military power. Right now China and the East are kicking our butts. That can be reversed if we get our act together. The pro business Horatio Alger spirit must be our ultimate goal. We can be both pro business and pro regulation of business abuses. President Obama must understand that it does not have to be an either or situation.

At this time I am long selective stocks such as AAPL, CMG & MMR. At the same time, I still have a decent cash position and am cognizant of the fact that the market is extended on a short term basis. In fact, I am amazed that the market has run up this much on low volume without correcting.

Therefore, I will take profits in extended stocks and wait for pull backs to buy other stocks I like such as JDSU. I will also keep my options open to the idea of shorting the market via index ETFs if the market takes me there.