Are Stocks Markets Ready To Take A Breather?

If you are long on stocks, it is hard to imagine how you could be trading in losses at this stage of the game. But nothing can rise indefinitely, no matter how strong the underlying fundamentals and there are now reasons to believe that stock markets are ready to take a breather after the massive multi-year run higher. One of the best indicators of future performance will likely be seen in the SPDR Gold Trust (ARCA:GLD), as one of the most commonly traded stock ETFs and an asset that tracks the underlying performance in the S&P 500.

So, which factors are likely to drive stock markets going forward? Are there reasons to believe that equity markets could see some downside corrections before the end of this year? The answer to these questions should be relatively clear but at this stage it looks as though most investors have not started to prepared for trends that are likely to emerge in coming months.

The Fed Effect

“Recent comments from Fed Chairman Janet Yellen have all but confirmed that the historical QE stimulus program enacted by the Federal Reserve will be ending soon,” said Kris Alban, markets analyst at InvestingIQ. “Specifically, Yellen has suggested that QE programs could be entirely phased out as soon as this Fall.” This type of activity should have some very clear effects on most of the major asset classes, from commodities, to stocks, to currencies. Precious metals tend to be one of the most closely watched asset classes, and if we start to see tapering programs bring a bullish surge to the US Dollar some of the earliest casualties can be seen in ETFs like the SPDR Gold Trust (ARCA:GLD) and the iShares Silver Trust (ARCA:SLV). Many precious metals investors are looking for good and cheap values in assets that are tied to the underlying changes in gold and silver prices.

But it is important to proceed from here with caution, as there is still some significant downside potential -- perhaps even more then what is likely to be seen in the central stock benchmarks. This of course would mean there there could be better opportunities in currency ETFs like the PowerShares DB US Dollar Index Bullish ETF (UUP), so this could turn out to be a key selection for ETF investors into the latter half of this year. The interplay between currency ETFs and commodities ETF will also be present in instruments like the United States Brent Oil Fund LP (BNO), which could suffer if phased-out stimulus programs put pressure on consumer demand for energy products.

With these factors in mind, investors will need to remain cognizant of any potential changes in the Fed’s policy stance. From a macro perspective, this will continue to be the single most important factors that drives market valuations in the coming months. Those that are not prepared for these changes could encounter unnecessary losses that could easily have been avoided.