Earnings season is now officially underway, but the Fed is still holding the limelight, as traders anxiously awaited on Wednesday the FOMC minutes from the June 18/19 meeting. Although several members are pushing to begin tapering off this fall on asset purchases (bonds and mortgage-backed securities), which spooked the markets, in fact it now appears that the controlling opinion is that the U.S.

The beginning of Q2 earnings season got off to an inauspicious start with Alcoa (AA) barely beating highly reduced estimates by a single penny per share. Alcoa’s CEO provided cautionary but optimistic guidance on CNBC after the market closed. AA’s shares initially climbed a bit in the aftermarket but have since given most of that back.

I suspect there is no greater example of “summer doldrums” than the week surrounding the Fourth of July, especially when the holiday falls mid-week. From my standpoint, I certainly have received my share of “out of office” auto-responses on emails. For bullish investors, this is usually a time for caution, as any apparently dominant psychology of the market can be misleading. For bearish traders, it’s hard to get much momentum going.

Returning to last week’s thesis, which was that if the plethora of economic reports last week’s were good to okay, S&P support levels would hold and the market rise on the flow of funds from recent long bond sellers.  I do think this indeed happened.

Why?  Here are several supporting reasons:

Clearly, the rapid exit of dollars from the fixed income market has not yet translated into a rapid flow of dollars into the equity markets, but equities is where much of those funds will likely end up, given the rising risk of bonds. It is really a case of “who blinks first.” Assuming the stock market holds near the current support levels, it is our opinion that the bond contingent who have sold or will sell their bonds will blink first by purchasing equities.

The world has been watching every peep, sniffle, or innuendo associated with any voting member of the FOMC. What is the future of the latest in their ongoing market manipulation, in which money is printed to buy bonds to hold down interest rates, spur corporate borrowing, and artificially inflate stocks? Lately, that’s all investors have cared about.

The market responded well today to good economic news and to the positive and somewhat surprising response to the election of a moderate Iranian President.  Some moderation in Turkey didn’t hurt either, and overnight positive markets in Asia and Europe gave bullish investors enough encouragement to buy equities broadly. We think it likely that this week the market will challenge highs that were set in late May.

Stock investors are protecting gains and holding off on deploying cash as concerns abound about central banks, including the Federal Reserve, tapering off on their stimulus programs, i.e., money printing. Low-interest policies and quantitative easing have been the driving force for economic recovery while pushing return-hungry investors into equities by default.

Despite today’s roller-coaster market, the market ended up essentially flat. But questions abound. Will interest rates start rising now in a meaningful way? Will the European courts find yet another way to derail the country bail-outs? Will Asian issues result in something positive for our markets, or will Asia continue to vacillate on most matters? Those questions remain to be answered. In the meantime, we’ve found four stocks that may be right for this market, one in the Technology Sector, one in Financials, and two in Consumer Cyclicals. 

Here in Santa Barbara, we refer to the annual summer ritual of heavy marine layer engulfing the coastline for much of the day as the “June gloom.” It can be frustrating to beach-going visitors since there are otherwise no clouds, and the inland areas are brilliantly sunny.