I will give you my thoughts on what is going on in the stock market. You had the S&P volatility explode to the upside and people are just trampling over themselves to buy equities these past few days.
First on Monday, May 13, there were stronger US data, and the dollar rally was not even able to dent the rally much. Normally, if the US dollar strengthens that could be bearish for U.S. Equities. But even on Friday last week, I noticed that the S&P just didn’t care about the stronger US dollar. Thus that is a bullish sensitivity signal that it is free to continue moving higher.
Then on Tuesday, May 14, the market rallied further as the mere tripping of the topside stops and posting fresh highs was enough to cause a sent/psych shift higher. Same thing happened again today when the marker tripped the topside stops and made fresh highs.
The interesting thing is that the S&P went up even on bad U.S. economic data. So the market is using the weaker econ data as another excuse to continue buying equities, since weak data will mean that the Fed may continue the current QE pace for longer than expected. Also, inflation is still low in the U.S. as the PPI confirmed today. Crude oil prices are still contained, and since there is low inflation, that could convince the Fed to continue the current QE pace for longer than expected.
So now, going forward, the market is going to try to figure out: When is the Fed going to taper the QE? And if so, by how much?
1. If the Fed does not taper QE, either due to a combination of insufficient job gains, low inflation, weak econ data, then the market can rise even further to the upside as people would be convinced that the Fed is still going to QE so much even in the face of the stock market rally that is getting very volatile.
2. If the Fed only decides to taper a little bit, say by cutting $10 billion or so, that may not be a big enough of a taper, and the market can decide to shrug it off and go higher.
3. The other option is for the Fed to realize that the stock market is getting into bubbly territory and decide to taper a decent amount, so as to cause a gradual correction in the market.
Those are the three different scenarios I see. Personally, I think a bullish outcome is going to happen. Either the Fed is not going to taper yet, or they will only taper a little bit, which should cause a further rally in the stock market even from the levels it currently is at. That would be my current view based on the information flow I have interpreted up until today.