Year End Rally?

After dropping notably for the first time in many months, last week the S&P500 jumped right back to make up for the prior week’s losses…and then some. The buy-the-dip mentality has completely taken over the US stock market in a way not last seen in 2007, when many market experts asserted that the Fed would simply not let the S&P fall too much so every dip ought to be bought. And it was.

Apparently the same thing is happening today. What remains to be seen if the 58% meltdown (or something similar) that followed the 2007 highs will also follow the surge in 2013.

Volatility, last week, slumped back down close to 2013 lows, which supports the buy-the-dip mentality. Yet volume remained light, which—-in addition to a lack of conviction—might have something to do with the fact that most of the US population does not have enough spare capital to invest in the stock market, despite the massive rebound in we’ve been ‘enjoying’ over the last few years. While most of the population has been suffering from declines in real wages, the top 1% has been the sole beneficiary of this rally. If only top 1% would spend more so that the Fed’s ‘trickle down’ theory would actually kick in to boost real wages, spending and savings that could then be recycled into the stock market to broaden the participation in the market gains. Fully four years after the stock market bottomed, we are still waiting for this effect to begin.

Technically, the S&P500 is back to being extremely over-stretched on daily, weekly and monthly resolutions. There are virtually no bears left in the US stock markets, and the percent of investors who call themselves bulls is near record highs. One can only hope that nobody ever needs to sell his or her shares because there will literally not be any buyers who could possibly buy them….at today’s lofty prices.

In the real world, the US economy continues to limp along. The Empire State Manufacturing survey missed expectations, badly. Consumer prices, as measured by the official government agency charged with reporting these figures, remain relatively tame; just don’t pay attention to soaring food and energy prices. Industrial production beat expectations, as did housing starts. Initial jobless claims missed badly. Existing home sales disappointed, as did the Philly Fed survey. GDP growth was revised higher, but that was mostly due to soaring costs of healthcare and fuel. The big announcement of the week was the Fed taper, which will be reducing the Fed’s monthly QE program from $85 billion to a whopping $75 billion. Put another way, instead of printing $1 trillion of money per year, the Fed will only be printing $0.9 trillion of money per year. Either way, the monetary stimulus remains massive.

Finally, history suggests that in the final week of the year, a yet further jump in equity prices would not be out of the ordinary. In fact, it’s become so common, that traders have nicknamed this effect the “Santa Claus Rally”. Why would Wall Street like to see this happen……pretty much every year without fail? Simple—by boosting prices into the year end, Wall Street ‘professionals’ boost their own year-end bonuses. In other words, this benefits Wall Street much more than it benefits Main Street…….as usual.

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