Suddenly the Stock Market Has Broadened
Where Does It Go Next?
The Three E's: Election, Europe, and Economy: And Why the Markets are Rallying.
Global stocks are in the midst of an actual summer rally. The question of course, is how long will it last? The answer may be in the three E's: the election, the economy, and Europe.
First, the election: Mr. Romney, according to mainstream polling is falling behind. Even in Rasmussen's tally of likely voters, he has begun to show some slippage. Is that important for the short term performance of the stock market?
That's a tough call since there is a tendency for stocks to rally starting in June-July of the 4th year of the Presidential Cycle into December. It seems that this year is following the script fairly well. Whether this has anything to do with the candidates or with something else has never been explained. A succint summary of the Presidential Cycle is available on pages 93-96 of Market Timing For Dummies
What seems to be clear, at least over the last couple of months, is that we may be in a very good seasonal cycle. Thus, the election, regardless of party affiliation, may be a positive for stocks at the moment.
The economy is something else. There is some evidence that a bottom for the U.S. economy is in place. Data has been mixed of late, but a rebound in housing and in consumer confidence may be enough to keep things from falling apart altogether. In a world of lowered expectations, this may be a positive for stocks, in the short to intermediate term.
It is interesting, though, that Wal-Mart made comments after its most recent earnings report about how consumers are living "paycheck to paycheck" these days.
Perhaps the most interesting development in the economy is the expiration of the long term uemployment benefits. This has led to a decline in the widely followed weekly jobless claims numbers. The real issue here, though, is whether those people who no longer receive benefits will go out and look for work. More important is whether they will find work, and what kind of work, if they actually get a job.
This will make the August jobs report even more interesting. There is some data out from Gallup that suggests that the numbers should be fairly bad in August. They do point out that the potential for data adjustments and so forth, could distor the overall report. Still, the economy is increasingly important. The take home message here is that the jobs report, still three weeks away could change everything, again.
Finally, there is Europe. The latest take is that Angela Merkel is warming up to ECB chief Mario Draghi's plan to make everything better. No one really knows what Draghi's plan is, but it is expected to include a good deal of money printing, or quantitative easing.
The markets love free money. So if Draghi is finally unleashed and he hits the turbo button on the printing presses, we would expect the Federal Reserve to hit the button as well. The combination of a mountain of dollars and euros, unleashed on the global economy simultaneously, may be yet another reason to own stocks.
Finally, from a sentiment standpoint, the guys at Pimco have been very negative on stocks. Buffett has been negative on stocks as well. It's hard to tell whether those are contrarian opportunities or not. Pimco is a bond house, so their take on stocks should be considered bontha fodder. And Buffet, of course, drives up stock prices just by buying companies.
Yet, their opinions do move markets. And they do have access to information that the rest of us don't. We'll just throw that out there for completeness sake.
What's the take home message? We are in a seasonally positive period for stocks. And the potential for a huge reset on global money supply is still out there. That's a strong combination for the next few weeks to months. Until, of course, reality sets in.
The Markets
The S & P 500 (SPX) continued its steady climb on 8-17 but the rally expanded as the small stocks put on a big show of momentum.
Chart Courtesy of StockCharts.com
The small stocks in the Russell 2000 index (RUT) ended last week just shy of a breakout. This is significant, either because the rally breaks out to new highs or because it fails. It's that important.
Chart Courtesy of StockCharts.com
The Nasdaq Advance Decline line (NAAD) had another good day on Friday and seems to be on a roll. It's not a coincidence that NAAD is moving nicely higher along with the small stocks. Both of these indicators are confirming each other, signaling that the rally is starting to broaden out. This is a big positive.
Chart Courtesy of StockCharts.com
The Nasdaq Hi-Lo line (NAHL) is also looking better. When this line moves higher it signals that there is upward momentum in the market.
Chart Courtesy of StockCharts.com
Conclusion
The stock market is starting to show signs that it can extend this rally. As with any rally, external events can derail things.
In this case, we should be wary of events in the Middle East as well as disappointments coming out of Europe and the Federal Reserve.
Yet, what we see right now is clearly encouraging.
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