With the Fed squarely behind the economy and by proxy the stock market, you'd be remiss not to buy risk assets.
That's been the prevailing thesis on Wall Street for much of the summer, with pros renewing their enthusiasm for stocks after the Fed announced a massive new stimulus program on September 13th.
After all,Ben Bernanke has been a powerful market catalyst – far more powerful than conventional influences such as corporate earnings.
And for that reason, trader Brian Kelly says in this market, he's long.
Considering the sharp gains already, he expects to see a chase for performance, in which money managers are compelled to buy stocks, simply because they're underpeforming their benchmarks.
However,, Kelly also tells us there are a handful of negative catalysts looming over the market, and if they take a turn for the worse then all bets are off -
Not only could stocks reverse but the reversal could be rather dramatic.
1. US "Fiscal Cliff"
Kelly fears the 'Fiscal Cliff' could start to immobilize investors, as they worry the GOP and the Obama administration won't bridge differences before year's end. In the event they don’t, as soon as January the nation could be faced with $665 billion worth of expiring tax cuts as well as automatic across-the-board cuts in spending.
2. Potential Spanish Bailout
Although some investors think a Spanish bailout would be bullish for the market, Kelly sees it as potentially negative simply because it could remind Wall Street how weak parts of Europe remain. This could trigger a downward spiral.
3. Japan Budget Vote
An impasse among Japan’s lawmakers could prevent a bill from passing needed to finance 42% of the national budget for the current fiscal year through March.
“If any of these catalysts take a turn for the worse, and the markets begin to focus on these fiscal events I would not be surprised to see a significant risk-off phase,” said Kelly. And until investors get a satisfactory resolution Kelly believes the market will stay in risk-off mode. "It could be quite prolonged."
"The Kudlow Report" airs weeknights at 7 p.m. ET.