Permabears who have waited patiently for The Mother of All Corrections should take encouragement from the blithe demeanor of yesterday’s 87-point rally in the Dow. It left the Indoos sitting above 15,000 for the first time and the network anchors oohing and aahing as though they understood what it means. Our take is that the little guy has not only returned, but that he is ready to party. And what better signal could there be that the end is nigh? With yields on fixed-incomes at historical lows, there was nowhere else to go for the mullet-topped investor with a small wad of cash. Nor can you blame him for taking the plunge so belatedly, even if out of frustration. After all, the blue chip average had gained nearly 130% percent since March 2009 without a single correction worthy of the name.
Now, for most investors, the stock market has become the only game in town, even as the supposedly smart money levers up real estate in Phoenix, Tampa, Las Vegas and other by-now giddy redoubts of America’s induced housing recovery . Will John Q. Public’s desperate scramble for yields end badly? Of course it will. Any bull market that takes its inspiration solely from a government-sponsored housing bubble and fraudulent employment data is surely headed for trouble. But for the time being, at least, the individual investor can enjoy the H.M.S. Titanic’s amenities as it plows through a darkening economic tide at full steam.
Yellow Flags Everywhere
From a technical standpoint, but also a contrarian one, we see yellow flags all over the place. For at these heights, Mr. Market has a commanding opportunity to spring the Mother of All Bull Traps. Accordingly, we have prepared subscribers for an imminent top in the broad averages, advising them to lay out tightly stopped shorts at price targets derived from Hidden Pivot Analysis. But even we would have to concede that if the technical obstacles are easily swept aside — always a possibility — a blowoff phase most likely awaits. If past is precedent, in the months ahead, emboldened by the pundits, investors will find it frightfully easy to believe that stocks are fairly valued and cheap at these levels, notes our friend Barry Leonardini, a former heavy hitter on the Pacific Exchange floor. “I have one question for this collective group,” notes Barry: “What are the earnings of S&P companies if the Fed weren’t buying one trillion of Treasuries or mortgage-backed securities per year, along with the one trillion that Congress spends per year that it doesn’t have?” Few investors seem to be asking that question now, but we have little doubt it will be the only question they are asking at some future date.
What about the fact that European banks have proven they will take depositor’s money to fund their own deficits, thus making the US stock market look like a pretty good/safe investment? If banks will take depositor’s money, why wouldn’t they also confiscate gold if it suited their purposes. Doesn’t anyone think that maybe the rally is due to investors moving from Europe to US stock market?