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Was Janet Yellen's Irrational Exuberance Moment a Sign of the Bull?


The Fed's history of predicting stock market movements is not exactly accurate.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Market Update: The Bifurcated Market Returns

The market is becoming bifurcated once again. We highlighted this point back in March and April [subscription required].

Back then, we saw the Nasdaq (INDEXNASDAQ:.IXIC) and Russell 2000 (INDEXRUSSELL:RUT) underperform while the Dow Jones Industrial Average (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) outperformed.

Now we are seeing everything hold up rather well except for the Russell 2000.
As of Tuesday, the year-to-date return for the S&P was 6.8% vs. -0.6% for the Russell. That's a huge difference.

The Fed's Timing Is Awful: Stretched Valuations

Yesterday, Fed Chair Janet Yellen said she was concerned that valuations for social media and certain biotech stocks were getting stretched.

The most famous time a Fed Chair expressed any worries about the market getting too high was back in 1996 when Alan Greenspan said he was concerned that irrational exuberance had taken over.

His comment was way off and preceded one of the strongest bull markets in history (the dot-com bubble). History is littered with countless examples of the Fed failing to accurately time markets.

So I'm interpreting Yellen's comments as bullish.

Remember, the market will eventually go down, but not because one person thinks valuations are stretched or that investors are exuberant.

Earnings Remain Front & Center

The market remains strong as last week's pullback ended. The SPX and Nasdaq are trading just below their 2014 highs, which is a bullish sign. The fact that the market refuses to fall is bullish in and of itself.

To be more specific, I'd like to see the major averages pull back into their respective 50-day moving averages and then take off again.

Separately, earnings season is now upon us. As always, we won't just look at the data; we will focus on how the market (and our universe of stocks) reacts to the data.

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