Here's the issue as I see it - the stock market clamored all summer for more Fed easing. So, despite the fact that all of the major indexes were near record highs and the fact that the jobs data seemed to be improving, the Fed caved on QE3 and promised more easing. That calmed the markets and they are now patiently awaiting word on QE4 (I'm only half joking, some are already talking about the next round of easing before this round has kicked in).
However, if the Fed's goal is to suppress interest rates to punish savers.... I mean spur investment and jump start the economy how do we explain the last week? Unemployment is now under 8% and today new jobs claims tumbled SHARPLY to a level not seen in years. If the economy has turned the corner then surely the Fed won't be buying up all of those mortgages? And if that's the case, interest rates will rise and the stock market will fall (despite an improving economy).
Here is the situation we find ourselves in today. The market can only go up for extended periods based on hope and fairy dust from the Fed. The real economy has little bearing on the market. To that end, consider this stat I read over the weekend from the founder of a leading market data firm who said that "99.9% of all quotes in the market today are high frequency trading related". Think about that for a moment. If a stock has 1,000 bid/asks only 1 is from a human!! The rest are computers just waiting for the human to slip up. Hence, my decision to hang up the my trading jacket though I do remain active with several longer term positions.
It's worth it take a look at the increase in high frequency activity in the markets over the past 5 years by visiting the NANEX site. It takes a little while for the GIF to run but it's worth the effort to see the change in the markets.
I won't get into the whole host of conspiracy theories out there re: the dip in the unemployment rate from last week. The rate dipped but I expect it will rebound a bit in October (or hold steady with a revision to the September data). The big story remains the low participation rate, but I'm not a believer that participation is low because the economy is weak but rather it is the baby boom generation which was decided they like early retirement. The traditional retirement age of 65-70 has been replaced with a huge segment of our population that is retiring at 60-62. This trend is going to continue for a long-time until someone in Washington decides to change it (very unlikely).