Rally All the Way to Super Bowl Sunday

12/16/2010 3:29 pm EST

Focus: MARKETS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

The tax compromise and a friendly Fed clear the way for a rally into Super Bowl Sunday, argues Bryan Perry of the Cash Machine.    

The competition for front page headlines is stiff these days, chock full of bold statements like those from Federal Reserve Bank Chairman Ben Bernanke recently stating that he's "100% confident in his policy making."

That's pretty confident. I wish someone in the currency pits would have a similar level of confidence in that proclamation.

But when the unemployment rate jumped from 9.6% to 9.8% and the deficit commission super majority vote was defeated, the dollar topped out, commodities and oil rallied and the stock market began testing its 52-week highs with a new sense of optimism led by inflation-sensitive sectors.

A Bag Full of Goodies
But it gets better. President Obama laid out a deal for the Bush-era tax rates to be extended for two more years, estate taxes will be reinstated at 35% with a new $5 million cap (nice!) and unemployment benefits for 2 million Americans will be extended for another 13 months. Not bad for a bunch of sand-kicking malcontents who prefer ego-nog to eggnog as the holiday drink. Whatever the circumstances, as far as your money goes, the tax pact was a net-net good result for both the bond and equity markets.

From an economic standpoint, a lot of stars lined up these past few weeks that added pricing power to goods and services, the very forces that ignite the fires under the labor markets. When you can raise your prices at a gradual pace, you can afford to hire another worker to leverage on that uptrend. Given the draconian stance by the Fed against the prospect of a deflationary spiral that would seize up global financial markets, one can argue that the bond and stock markets are on much better footing than even a month ago.

Calling a Bottom to Bonds
Pushing on the dollar string, the yield on the ten-year Treasury Bond sliced through 3% like a hot knife though butter and kept going.

Given the Fed's rhetoric for maintaining an artificially low Fed Funds rate, I expect yields on Treasuries to not move much higher. The big short-term move has happened and the bond market has adjusted to the tepid improvement in the macro economic picture here at home, helping US stock indices outpace emerging market gains for the past couple weeks. It's a notable shift.

If the rally in these sectors is genuine, then we can see another 5% to 6% upside for all three major averages by Super Bowl Sunday before hitting significant technical resistance. I wouldn't be surprised to see an attempt at Dow 11,500, S&P 1,300 and Nasdaq 2,800. Dividends have been rescued from the tax man and money is coming off the sidelines. It's the perfect backdrop for high-yield assets.

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