A Rally In Advance of Central Bank Stimulus

As expected, the S&P500 climbed 1.3% last week, because the short-term uptrend that was established the prior week was still in effect. But the rise in prices wasn’t as strong as the 3.7% rise the week before, so momentum is weakening. And this is backed up by a decline in volume. Also, volatility barely changed; this also suggests that upward price movement is not well supported.

Technically, some breadth measures point to a very overbought situation. The McClellan oscillator is near levels that are usually associated with pullbacks. Other longer term breadth indicators are still bearish. The new high minus new low index has been, and still is, trending downward. Finally the weekly price charts for the S&P are still in bear mode. The downtrend that began in April is still in intact.

US macro news continues to deteriorate. Retail sales, ex-autos, fell much more than expected. Initial jobless claims are knocking on the door of 400,000….a level associated with official recessions. The Empire State manufacturing survey collapsed. Industrial production disappointed. And the stunning number of the week was consumer sentiment. Over the last two months, as corporate production data slipped lower, consumer data was staying resilient. Until now. Consumer sentiment on Friday fell far more than expected, to a level last seen in 2011.

So how are US equity markets holding up so well….in the face of a clear global economic slowdown and a still unresolved European crisis?

Simple. Equity markets have been trained, like Pavlovian dogs, over the last three years to have the Fed come to the rescue and pump up stocks, but only AFTER they have fallen over 20%.

This year, in the face of even more dire economic news, US markets have fallen less than 10%, and have already started to recover?

Why? Because markets are now pricing in a Fed rescue….well before….any rescue has even been announced.

If you’re trained to believe that the Fed will bail out sagging stock markets, then why not just keep buying stocks, or at least why not keep holding on, when you know, just know, that the Fed will pump prices back up anyway?

What can go wrong?

Interestingly, that’s very much what many stock market experts claimed would happen in 2007 and 2008.

According to them, there’s no near to fear any stock market declines because the declines would be mild and even then only short-lived.

But then something went horribly wrong. Somehow, US stock markets fell over 55% at the lows in March 2009.

What’s most interesting is this—only three years later, many market participants have forgotten this little fact….this failure of the Fed to keep stock markets from imploding.

According to these market experts, this time is different; this time the Fed won’t let it happen.



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