Price Action Without Fundamentals—It’s a Dangerous Game

The S&P 500 Index broke the 1,200 level and it’s significant in terms of the rally that began just at the end of August. It was only a few short months ago that investor sentiment was in terrible shape and no good news could move share prices higher. We’ll see how far stock prices can keep rallying. The market is due for a correction, but it seems likely that the near-term action will continue to be higher. Investors are happy to be buying stocks in this market.

It’s also increasingly likely that gold will hit $1,500 by the end of the year; an accomplishment that might happen solely due to a weaker dollar. The way the action is now in commodities and equities, being fully invested is rewarding.

The global marketplace likes gold, because U.S. Treasuries are offering less attractive yields due to Fed action. It’s the right time and the right fundamentals for gold to keep rallying. While there’s no sure thing in capital market, the probabilities of further gold price appreciation are high.

If we start to get a meaningful turnaround in the employment situation, then the current stock market rally will have some real legs. The other big economic quotient is the state of the housing market, but home prices don’t need to accelerate for stock prices to move higher; they only need to stabilize.

The other big “if” is the inflation situation. Consumer prices for a number of goods are going up now. Consumer price inflation will only serve to create a more difficult situation for individuals, because incomes are not going up to compensate for the higher cost of raw materials. We could very soon get into a circumstance where commodity and stock prices rally higher, while consumers become less wealthy due to the higher cost of staple goods. It’s a situation that could cause a lot of pain for consumers and create a lot of wealth for investors.

Right now, the economic data do not support the current trading action in stocks in my view. The fundamental economic situation is currently being triumphed over by the monetary policy situation. This isn’t sustainable and, unless the numbers for employment, retail sales, incomes, etc. improve, then the equity market is setting itself up for big disappointment.