Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Very little change from last week. Whatever the news it is good news for the market – the economy is not strong enough to stop QE, but not weak enough to worry anyone. We are in this perpetual 1-2% type of GDP, with job growth just above population growth each month and little inflationary pressure in figures the Fed cares about. It remains all about central banks – the twin powers of Japan and U.S. continue to plow ahead unabated (with the yen decimated even further last week). Last week a bevy of central banks joined in easing – Australia, South Korea, Poland, among a few others; again just last week alone. This morning Israel joined the party; it has essentially been a bank a day this past week. There really is no other discussion than the global action by central banks; it dominates everything in these markets. Late Friday, the Fed talking head at the WSJ, Hilsenrath, wrote a story about a “plan for a plan” (Fed Talks Exit blah blah) to slow down easing in the future but it has nothing to do with anything in the near future. An exit of any proportion is so far in the future considering the QE lever will now be used rather than interest rates – i.e. rather than $85B a month it might be $65B or $50B but then in the next recession heck it could jump to $110B)
Not much “analysis” really means anything anymore – we have all sorts of records being bested or matched; the longest streak to begin a year without a 5% correction in many years; the longest streak without 3 consecutive down days in the DJIA since 1958, margin debt back at records, etc etc. Hedge fund manager Doug Kass gave his mea culpa last week, noted economist Nouriel Roubini threw in the towel saying go long for another 2 years before it all bursts and so on and so forth. No one wants to fight the central bankers. There has been very little in terms of earnings growth, it is all about PE multiple expansion – just in the first 5 months alone the forward looking P/E has risen by 1.5. Markets that go up on P/E rather than earnings are impossible to really gauge – we saw in 1999 the P/E can expand to whatever is wished for by the central bank when it goes bonkers reacting to crisis (LTCM in 98) or in advance of a potential one (Y2K). The things being done now by the central banks make all that pale in comparison so who knows.
As for the markets themselves after a lot of negative divergences for two months, the market has made them all go away. After breaking a key support line mid April the S&P 500 has done yet another V shaped bounce as it has done over and over since 2009, confounding everyone who remembers the market pre 2008 when rallies were gradual and drops were sharp. No longer the rule. S&P 1597 was the breakout level from a week and a half ago but frankly it doesn’t seem to matter if we fall back below it because the dip buyers show up no matter what.
Small caps via the Russell 2000 actually were the weakest index – the one to make a “lower low” in 2013 in mid April; hasn’t mattered – this market is now back in a leadership position which is bullish.
Breadth has improved dramatically after “sucking” for a few months.
The past two weeks has seen a sharp turn in which sectors of the market have taken leadership – for over two months it was large cap defensives located in utilities, consumer staples, and healthcare. That has turned 180 degrees and a lot healthier group of cyclicals now has taken the baton.
Last, Treasuries after rallying with the market (strangely relative to action the past 3-4 years) finally sold off over the past 2 weeks – a net positive.
But frankly that is a lot of talk and chart drawing; in times like this it is intellectually bankrupt to pretend it matters – all that matters to this market is central bankers in every corner of the world uniting in driving up asset prices. Until something changes this market really only goes in one direction.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
