The rally to 1400 that was in my plan b template is becoming more labored and more narrow. More than a few groups are starting to turn down or heavy, including oil service, materials, housing, utilities, pharma, and autos. The Index continues to challenge the highs, yet more often, it’s fewer mo-mo stocks generating the gain. I don’t know about yours, by my long book seems to have run out of steam lately.
Stocks are up a lot from the “forgotten bear” market of 2011, the one the perma-bulls conveniently ignore when skewering current bears. The market was probably forecasting another economic downturn, and when it didn’t happen, 0% interest rates plus economic growth catapulted both offense and defensive shares upward.
Relentless pressure by the Fed to direct investors in riskier assets has propelled the final leg up in the biggest bubble yet, the fixed income bubble. At the top of the market, the Fed and the US taxpayor has exposure to many more Trilions of long dated assets than before, as the Fed manipulates interest rates to support asset prices and help the banking system reliquify. Now we are stuck with trillion more in government long bonds, trillions more mortgages, and a trillion more student loans. And the banking system and retail investors will be choking on hundreds of billions more in debt as well.
At the lowest interest rate in decades, investors are buying debt like it’s going out of style. Equities, on the other hand, are less championed, but they are hardly forgotten. At 16x’s estimated peak profit margin earnings, stocks have run hard and are getting fairly/over valued. They can get more expensive in a fit of speculation. But it doesn’t make shares a good long term call in here. My guess is stocks are priced for mid single digit, long term returns, with more downside volatility the bulls want to admit.
A week ago I wrote it makes sense to trim some long positions, especially the most expensive and overbought ones. That still makes sense. The bulls are really thumping their chests recently. Just like the bears did in the fall. In a trading range market, that’s usually a sign of closer to the top. That in itself justifies some reducing in exposure. Leave the last few percent for the very nimble traders. The easy money has been long made. And the dumb retail money is nowhere to be found.
The Fed is proud of its market manipulations, and its always difficult to fight them. The Bernanke is chomping at the bit to print Trillions more in order to save his banking cabal constituency. Investors want to cheer this. I say it’s fools’ gold. A scam, a ruse, to artificially inflate financial asset prices and not help the real economy. But that’s just me.
If you want to trade the Fed, and ignore the myriad of risks out there, go to it. Just remember, momentum and liquidity are fickle friends. They change their affections frequently.
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