The Fed may not be able to maintain status as the Wiz behind the curtain much longer

Calls are increasing for greater transparency, and even - gasp! - less power to the Federal Reserve, as reported in Bernanke Success May Come at Cost of Congress Curbing Fed Power (Bloomberg, 6/12/09). This week Ron Paul also announced he's gained enough co-sponsor support to pave the way for legislation calling for an audit of the Fed: http://www.house.gov/apps/list/press/tx14_paul/audit.shtml (6/11/09). I've got to think that this is a socionomic sign of a market peak, even if it turns out to be only an interim peak. Because when the markets seemed to be falling into the abyss of the lows in November 2008 and in February to early March this year, people were casting about and grabbing for any perceived support and solutions that offered themselves. It's a sign of more relaxation and confidence that legislators feel ready to second-guess some of the financing and monetary mechanisms that were supposed to be keeping the markets glued together.

Of course there's plenty of anger that the markets DID "fall apart" in the first place. Despite the rally so far, the markets are still far down from 2007 and there are more and more reports of financial pain caused, directly or indirectly, by the unwinding of the credit bubble. Lo and behold, there are pension funds, municipalities, and now even state unemployment insurance funds that are running dry. News reports today were identifying 14 states whose unemployment insurance funds have actually run out, with many more getting very low.

Raymond Merriman's comments about the psychology of the times, with the Fed facing great pressure and those in power demanding greater regulation in many ways, seem to be playing out on cue. And it seems increasingly that all the responses coming from Washington D.C. are "certain" to drive down the dollar - ranging from bailing out state unemployment insurance funds, to all the stimulus funds supposed to be in the pipeline, to ideas about rescuing health care by tossing more billions or even another trillion onto the heap of taxpayer-funded "reforms".

One would think that all this would drive the dollar down to new lows, although the dollar may have other plans first (like surprising many with another rally leg up of its own). But let's think about this - would we be supposed to think that all these proposals are good for the markets, either indirectly by smashing the dollar and artificially raising asset prices, or directly by somehow stimulating private companies (the same ones coming under the thumb of increasing regulations)?

Well, I've already strayed rather far into the realm of economics, which I typically allow others to address. All this is to say that the fundamentals for driving the markets yet higher, are not exactly apparent to me. But as an unbiased trader, I'll take the market for what it's saying and let price be the ultimate indicator. The market already went to the 838 that I first considered off the March lows, and has now proceeded up higher Fibonacci levels including the 950/960 area. I believe it's most likely that the market's about done with this rally, and will be surprised if it is able to sustain any move higher. If there's a move that does poke higher, I would not expect it to sustain but rather be more like a stop-running move to take out the bears (short-sellers). If I'm wrong and a higher move does occur that sustains with the indicators confirming strength, then I'll go along for the ride up to higher levels such as the 1020 area or even 1060.

Meantime, keeping an eye on the side show that is becoming (or rather, unbecoming) the Fed should be entertaining at best. At worst, it may transmogrify into one of the negative factors that gives the markets a nasty surprise later this year.