Does going up 10% qualify as a strong trend? Well, we've gone up about 10% from the lows on July 1st in 1 month. From my experience, strong uptrends end with good news and very bullish sentiment and strong downtrends usually end with bad news, fear, and very bearish sentiment. The rally up to 1130 ended with the Chinese yuan revaluation "good news" while the selloff to 1006 ended with a string of below consensus economic data culminating with a weak ISM number.
The current juncture is a strong ongoing uptrend without the big bang of good news or bullish sentiment which usually mark the end of the move. The fundamentals are getting worse. So why doesn't the market go down? In a word,
liquidity. That is a topic for another day.
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6 comments:
I must admit to being very confused right now. I agree that there is not a ton of enthusiasm but it seems like active traders have warmed up to the market and we got the majority of the bang from the extreme negativity in early July.
In order to get another leg higher the market is going to need to get hedge funds to re-risk or a major M&A cycle. With seasonality negative and economic numbers likely to come in weak its hard to see what can force the hands of hedge funds. If Genzyme sells itself and then we get another large deal that could start pushing the market higher at which point everybody will be forced to chase. But short of that Im not sure the market can climb much higher on its own.
At the same time with hedge funds already de-risked and few people leveraged its hard to see what could cause a major meltdown short of a major economic accident.
When you have commodities like the grains and softs going up effortlessly, along with gold at $1170 and copper at $3.30, with bonds having a strong bid despite a 100 point SPX rally, that leaves me to just one conclusion.
There is too much liquidity out there. Money has to find a home and some of it spills over into stocks despite the reticence of the public. The Fed is still afraid of deflation. Which means they will keep pumping out more liquidity in the future despite the lack of true deflation.
That "liquidity" argument can always be used. That did not stop the market from falling over 16% starting in late April.
The "liquidity" argument took a back seat to PIIGS debt concerns, the BP oil spill, and one bad news after another.
The rate of expansion of the Fed balance sheet is pretty extraordinary and beyond any period in recent history. Maybe some of that is "priced in", but it doesn't take away from the fact that the money is floating out there.
I wouldn't use the liquidity argument if I saw the Fed reduce its balance sheet. They are still using emergency measures when the economy isn't in an emergency state.
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