Transcendental Market Truths:
The Market:
The Fed and other central bankers, faced with a debt crisis worse than even the Great Depression (debt levels were not even close to current levels in the Thirties), have chosen to fight fire with printed money. And, the central bankers are succeeding so far. They won't be able to put Humpty-Dumpty back together again, but they will go down trying.
One reason they are able to reflate the markets is the fact that deflation is so strong in this crisis that they have a lot of slack to fill with very easy money. By keeping rates at or near zero, they can pump as much money as the markets need to reinflate. That's exactly why the markets are reflating as they are now. The real economy is not reflating, but the markets are. I've already seen the Value Line move into new high territory - on April 5, the Value Line closed at 2542.53, well above its prior all-time high of 2509.12. And, it hasn't looked back. Yesterday's high of 2628.50 proves that easy money can push market prices higher.
I have to seriously consider that if the liquidity engines continue pumping at this rate just how high the market could go. Since the February low of 1044.63 on SPX, that index has risen to a high of 1214, registered yesterday. That move was accomplished in 69 calendar days, or about 2.5 points per day. The market has 35 days to go to May 20 (the first of what will likely turn out to be the left side of a double top), so I could be talking about a further rise of 87.5 points ahead before the first of my expected tops. That would put SPX just above the 1300 mark in May. But, if the market continues at this pace to the second of the tops I expect (August 27), SPX could rise 335 points to almost 1550, or just below the 1576 all-time high of October 2007. Although it seems highly unlikely, the possibility remains that SPX could actually test its all-time high before turning down.
It's extremely doubtful that this treatment will produce a lasting remedy for what ails the financial system or this country, but it is part and parcel of the long-standing Fed policy that when one Fed-created bubble bursts, it must be replaced by another one. That's a policy which can only end in bankruptcy, of course, but the game keeps playing itself out as long as the liquidity flows and there's someone who is willing to borrow. The stock market is the ultimate destination for much of Fed liquidity as long as they can keep prices moving higher.
Headwinds to that plan were evident Thursday as the Europeans continue having the Grecian problem pop up again. More money is needed (I already told you that, but the market only realized it yesterday) and that sent the Euro lower against the dollar. This is paralleling the subprime mortgage problem. As one "rescue" after another popped up in 2007 to save the mortgage market, another problem would pop up. A bounce in the DXY (Dollar Index) yesterday also caused the bulls to pull in the sails a bit, but not much. And, the weakness I expect to see as the harbinger of real weakness to come - declining relative strength of the Russell 2000 compared to the S&P 500 - just isn't there yet, although it's approaching the all-time high set in 2008 during the heart of the financial crisis.
Money managers have been concentrating on the blue chips, but the Russell 2000 continues to outperform. As long as that relationship holds, the downside is limited in the market.
Options expire today, with the SPX leading the way early in the day. A consolidation here could represent a fourth wave correction within five waves up from the February low, with a final fifth wave rally into my mid-May top. The correction should be fairly shallow, with dip-buyers keeping the game afloat. |
