Too Cautious?

My weekend review contained more than a grain of caution. However, market news and price action since Monday were quite positive. The sanguine mood set in on Monday when Senator Dodd revealed his financial reform blueprint, which the market found less than threatening. Stocks rallied immediately following Mr. Dodd's press conference and S&P futures drifted higher overnight. On Tuesday, the market received another boost, this time, from the FOMC. The Fed delivered another shot of adrenaline as it maintained its "extended period" language. The S&P 500 broke above its 1150 resistance and today (Wednesday), a lower than expected inflation reading pushed the broad market higher.


Let's take another look at the weekend hypotheses and see how they measured up so far:
 1. Greece bailout and FOMC statement to set the tone for the week - hawkish "surprises" will set the stage for stronger dollar and pullback in risk appetite - Greece's bailout turned out to be more of a mess than anything else, but sometimes it's the thought that counts. At least for the first two trading days of week, concerns over Greece abated to some degree. Sending the euro higher.
The Fed, however, did not deliver any hawkish surprises in its statement. In fact, since the market was bracing for a possible hint of tightening, equities rallied in relief and the dollar slumped.
2. S&P500 at major resistance level. Break above 1150 expected to be capped at 1166. The more likely scenario, is sideways consolidation or a pullback to key support (1130, 1112). - The S&P did indeed break above 1150 and so far, capped exactly at 1160. Coincident? maybe, but we'll know more by the end of the week.
3. Expect a limited euro rally but capped at 1.3850 or 1.4000. - we did get a bounce in the euro. As of this time, it seems that euro was unable to break 1.3800 and is starting to head back down.
4. GPB priced in for a worst case scenario - as such, counter-trend bounce should not surprise but capped at 1.5550 - GBP bounce back did materialize aided by a better than expected UK unemployment numbers. We should still expect to see selling into GBP rallies.
5. Japanese hints of intervention and easing concerns over Greece, should keep yen on the decline. Any yen rallies should be limited. - USDJPY is pretty much flat since Sunday despite Tuesday's (Japan Wednesday) BoJ commitment for further easing to fight deflationary forces. The yen did loose some ground to the loonie and aussie. At this point, my assumption is that yen strength is a function of repatriation and that yen will continue to decline.
6. Loonie - ever closer for parity.

My view is that caution is still warranted. The recovery is still vulnerable and there are multiple single points of failure. Moreover, Mortgage Backed Securities (MBS) purchases by the Fed are scheduled to end this month and no one can tell for sure what impact it will have on the housing market (presumably, not a good one). Further tightening measures by China can also spook the markets and the eventuality of the Fed's tightening will have to set in at some point.