The market goes up for various reasons. This depends on in part what stage of the long term bull market cycle the market is currently in, which does in part reflect the current economic cycle. Here are some reasons off the top of my head:
1. Economics: low inflation and evidence of a healthy, expanding economy. The assumption here is that a good economic setting will provide for profits making by companies. So there is companies to be found out there that are making good profits.
2. Fundamentals: corporations,particularly the visible ones, reporting good and increasing earnings growth. The assumption here is that the future will extrapolate from the present good situation. This related to #1, but is not the same.
The two motivations above for the purchase of shares in the market are longer term in nature and more tenuously connected to the day-to-day price action of stocks. The following has a more direct bearing on day-to-day price activity .
3. Internals: the disposition of the "big" fund money where the funds are buying into the current market. This is experienced as an improving market situation and upward price momentum.
4. The public speculator: the public participation in the market will continue the effects of the purchases made by the funds by leading to a continuation of the bull market cycle. This leads to for instance higher volume activity and a greater number of stocks reporting new highs which elicits even more participation in the market by the public. The long term buying of the public for investment purposes will respond to the economics and fundamentals as listed in #1 and #2. In this way the investor discounts future anticipated corporate earnings.
4. Technicals: the ability for the market to trend in terms of price and price momentum. This also includes the day to day ability of the market to recover from selloffs and for profit taking to occur on price runups. This is as much of the day-to-day action of the individuals in the market as at times it can be the larger longer term forces of the "big" money.
5. Professional Interests: this is the element of the market takes a short term perspective to their trading, as short as less than one day. Due to the short term nature of their interest in the market, they tend to help facilitate market swings and then take the other side to the public interests. This along with the "big" money interests and the public interests show up in the technicals of the market.
Currently we are seeing with this current bull market significant changes from the last bull run before November of last year. First, this is a liquidity driven market and will continue to be in the near future. Second, the public is becoming more confident in the market with their positive sentiment they have been demonstratng for instance in their participation in the small cap stocks with the Russel 2000 making new highs. Third, the positive market sentiment is reveealing itself in a new way this time around. There are definite signs that the overall price action in the market is not as much based on anticipated corporate fundamentals in terms of improving earnings. The market now appears to be playing on the good economic environment which is #1 on my list that I have noted above. The thinking IMO is that with a good economic environment, there will be companies out there making a profit which plays can be made on. Also, perhaps the market is beginning to think that the problems that are manifesting themselves as an overall earnings slowdown will "right themselves" in the near future due to this positive economic backdrop.
For whatever reason, the market in general has become much more speculative and less responsive to the outlook of corporate earnings. this is why some are thinking that we are witnessing a "blowoff" that precedes a major market turning point. In my opinion, the only way we will be able to tell is to see what happens when the market liquidity dries up to at least return to more normal levels where all available fund money is invested in the market and the market has returned to what Donald Sew refers to as a more "normal" market.
Comments?
Bob Graham |
