The Bears Are Baffled
The major indices stepped lively to a fresh set of new highs yesterday with the Dow, S&P 500 and NASDAQ 100 all finishing at their highest levels ever. However, as has been the case for much of the year, the smallcaps, midcaps, and microcaps failed to confirm. And while this situation could be rectified should stocks continue to run in the near-term, the divergence between the generals and the troops remains an issue.
The problem is that such divergences are generally present at the end of bull markets. This is not to say that this bull will run out of steam any time soon. However, it is important to remember that tops in the market are a process and not an event. As such, those bears still willing to show their faces in public are suggesting that stocks could indeed be embarking upon a blow-off style top at this time.
A New Record
However, there can be little argument that the current joyride to the upside has been impressive. Not only did the S&P 500 close at a fresh new all-time high yesterday, the venerable index also finished above its 5-day moving average again - for the 23rd consecutive session. What is remarkable here is that such a feat has never happened before. Yep, that's right, the S&P has never experienced the type of straight-up advance that has been seen over the past 5 weeks.
S&P 500 - Daily
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Given that the sky was supposed to be falling on October 15 as the market flirted with a decline that was fast approaching the -10% range on the back of worries about growth slowing, many investors continue to scratch their heads about the reason behind the out-and-out romp higher that is taking place.
Wasn't Global Growth a Problem?
Compounding the confusion is the fact that many economies of the world are sagging badly at the present time. Japan officially entered a recession on Monday. The Eurozone is likely in recession, it just isn't official yet. And everybody on the planet knows that China is slowing.
Across the pond, the Bank of England's top guy fretted publicly about deflation this week. Mark Carney said on Monday that disinflation seems to be creeping in and that it may be three years before inflation reaches the central bank's 2% target.
In addition, the UK's David Cameron told the press this week that there are warning flags flying with regard to the state of the global economy.
In China, officials have been promoting new stimulus measures aimed at keeping the economy moving forward at an acceptable clip. The latest of which is a commitment to rebuild "the silk road" in an effort to make trading with the outside world easier going forward.
And yet, stocks in the U.S. just continue to dance merrily higher. So, what gives?
QE-Infinity Is a Thing
First and foremost, investors need to keep in mind that free money continues to trump just about everything in the stock market. In other words, the focus of the market remains on QE - and little else.
Remember that Japan just upped their QE program by 60% and that unlike the program in the U.S. that focused on gov't bond purchases, the Japanese are actually buying stocks and REITS as well as gov't bonds. And then after Monday's big economic surprise, PM Abe has dissolved the government, called for snap elections, and has tasked a committee to come up with more ways to stimulate the economy. In short, QE-infinity looks to be a thing in Japan.
Next up is Europe. While the ECB is famous for talking the talk without actually walking the walk, almost everyone expects Super Mario to actually fire the QE bazooka at some point in the near future. The bottom line here is that the economies of Europe are in bad shape and something needs to be done to keep the Eurozone out of a triple-dip recession, which would likely bring the sad state of affairs in the continent's banking industry back in focus. And from there, it isn't much of a leap to see the markets of the world focused on the European debt crisis - again.
Therefore, there is growing pressure on Germany's hawks to swallow their pride and accept the fact that the ECB has got to start buying €1 trillion or so worth of bonds on the open market in the near term.
The key here is to recognize that while the U.S. and the U.K. are ending their QE programs, the Japanese and the Europeans will likely pick up the slack. And this means that there will continue to be a whole lot of freshly minted money floating around the global banking system looking for a home. And where do you think a lot of that money is going to go? In the U.S. stock and bond market, of course.
As David Wagner pointed out in his post on financial relativity in this space last week, the U.S. remains the only real option to park large amounts of cash. So, while the color of the currency being printed may be different going forward, the QE trade will likely stick around for a while.
Next time, we'll look at a few more reasons why stocks continue to levitate here. Things like seasonality, performance anxiety, and the fundamentals of the stock market are likely to make the list.
Turning To This Morning
The focus of the markets this morning appears to be on politics, the potential for the ECB to embark on a QE program, and the Fed. On the political front, the vote on the Keystone pipeline fell one vote short in the Senate, so political gridlock appears to be alive and well in Washington. In Europe, S&P's chief European economist said that plans to spend €1 trillion on infrastructure will likely fail unless the ECB steps up to the plate with a pure QE plan in the near future. And here at home traders and economist alike are awaiting the release of the minutes from the latest Fed meeting. Recall that the statement from the October 28-29 meeting was viewed as being "incrementally more hawkish" than had been expected. On Wall Street futures are currently pointing to a slightly lower open for stocks.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.32%
Crude Oil Futures: +$0.24 to $74.85
Gold: -$0.90 at $1196.20
Dollar: lower against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 2.340%
Stock Indices in U.S. (relative to fair value):
S&P 500: -2.75
Dow Jones Industrial Average: -14
NASDAQ Composite: -05.09
Thought For The Day:
Happiness can be found in the darkest of times, if one only remembers to turn on the light. -Unknown
Positions in securities mentioned: None
Wishing you green screens and all the best for a great day,
David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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