Bulls on today’s stock market can list many sound arguments to support their bullish views. But when it comes to explaining the dramatic rebound from the March 2009 abyss for stocks, the unprecedented money printing (called “quantitative easing” in Fed talk) has become the foundation for the market’s strength.
Obviously, the Federal Reserve is not the only central bank that deserves the “credit” for the flood of liquidity into stocks, bonds and most commodity markets. In hindsight, apart from being on the short side, only with the rare combination of extreme bad luck and bad timing, it would have been virtually impossible to lose money in financial and commodity markets in the last 20 months.
Taking mid-March 2009 as the base, the S&P 500 is up by 77%, the Canadian TSX Composite up by 67%, London up by 62%, Shanghai up by 43%, iShares of 10-Y US Treasuries up by 10.5%, iShares of High Yield (Junk) Bonds up by 24%, gold up by 52%, silver up by 85%, crude up by 90%, copper up by 116%, corn up by 63%, and wheat up by 34%. Even the world’s weakest major market, the Nikkei, is up by 24%.
Regrettably, the Fed has been much more successful at creating bull runs in tradable markets than at reviving the economy, the primary target and reason for the desperately aggressive monetary policy. Hopefully, the second wave of quantitative easing (QE2) will go beyond benefiting only financial and commodity assets.
In my opinion, the anticipation of QE2 has been behind the 17% stock market rally from the July 2010 lows, and behind bringing most short interest rates down to historical lows. The threat of QE2 has also further devaluated the U.S. dollar against free floating currencies, especially against gold, the perpetual global currency.
The 17% rally in the S&P 500 from its July 1, 2010 low has been impressive, but pales in comparison to the gain of 25% in the NASDAQ 100. Together with the Canadian TSX Composite, these have been the only North American indices bettering the April 2010 market highs.
Powered by the likes of Amazon, Apple and Oracle, the NASDAQ 100 is not only three percent above the April 2010 high, but also within five percent of its November 2007 top. New 2010 highs have also been hit by the German and several Asian markets, including the strongest Asian market, the Bombay SENSEX.
As has been the case for the last two years, the accommodating monetary policy has kept my Fundamental/Monetary group market indicator very bullish. The happy days of September and October have had the opposite impact on my Sentiment group dominated by contrary indicators. At present, my overall main market indicator is neutral.
Just as the U.S. mid-term elections are about to take place, the short-term overextended U.S. indices are approaching their major resistance levels represented by the April 2010 highs. A break above the April 2010 highs will signal the start of a major bullish advancement for stocks. The failure to break the April 2010 highs will be confirmation that the long-term direction of stocks is down. The next few weeks of market trading will be critical in determining market direction for the months ahead.