Despite a sharp rise in bond yields, rising oil prices, a weak housing market and further troubles in the sub-prime mortgage market, the stock market managed to muster its biggest rally of the year. It now appears that the S&P 500 is headed for a retest of its record high of 1,552.87 set on March 24, 2000. A failure to break out convincing above this level may confirm a double top and signal the start of a major correction back to 1,250-1,300 level. A convincing break out could clear the way to the 1600-1650 level.
The 2003-2006 bull market has enjoyed a long run of solid returns and low volatility, aided by an economic a friendly economic environment of strong growth and moderate inflation. The Goldilocks scenario is now being called into question as inflationary pressures have added additional risks into the equation.
The stock market is never a one way street, and for the first time in several years the market is becoming increasingly volatile. As inflationary pressures call into question the current growth phase, the summer-fall time frame should see increased volatility on the downside. Like I said, it's never a one way street.
Since July 2006, the market has seen an unprecedented amount of liquidity injected as wave after wave of share buybacks, mergers, acquisitions, and private equity deals have shrinkage the trading float of public companies. The big question of course is when will this end?
We have called into question the how these private equity firms and corporations have acquired the cash to buy entire companies or buyback stock. The Yen carry trade has allowed private equity to borrow cheap money from Japan to fuel their endeavors, and some corporations have taken on debt to buyback stock.
As inflation continues to be a problem, bond yields will rise, and the fuel behind the bull market has been liquidity acquired from low interest loans. Once this ATM is slammed shut, this liquidity will dry up.
Earnings from US companies have benefited from continued growth overseas, but not here in the US. As an example, Yum Brands (YUM) said that profits rose 11.5% on strength in China and other international markets, but U.S. same-store sales were flat to down 3%.
In a nutshell, the US economy is not doing well at all.
The US consumer is tapped out, and currently owes more than 2.44 trillion in credit card debt. Inflation, higher energy prices and the loss of higher paying manufacturing jobs is continuing to eat away at the purchasing power of the consumer.
Inflation and our 9 trillion dollar debt to China is causing the dollar to collapse, and is making the cost of energy increasingly more expensive.
Today's retail sales numbers were not a great as the stock market made it out to be. In fact, when companies beat the lower end, of lowered expectations, how can that translate into a 283 point rally on the Dow?
As we have said in the past, there are some very strange things that have occurred in the markets since Hank Paulsen took office a year ago. Jeff Saut at Raymond James went on to list some strange, if not manipulative occurrences that have under Paulsen's watch.
Here's one to think about;
" Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time."
I am not smart enough to know when the party will end, but I will tell you that the stock market is not reflecting current economic conditions in the US. Like I said at the beginning of this post, the stock market is never a one way street.
