Outlook February 21 – Why stocks keep rising?

The recent Lunar Red Period ended with a 65 point gain on Nasdaq.
So the stock market keeps displaying strength upon strength, and we have been getting some questions how this is possible. We will be trying to give some longer answer today.

It is indeed weird that the Nasdaq seems to close with a 0.2% gain day after day after day, no matter how much it is down intraday, no matter what is the news..
So much for people who contend that stocks are in a random walk, but what we see those days is like tossing a coin 100 times and coming up with heads 90 times.
Over the last 3 months there have been only 2 down days worth talking about.
This means the Nasdaq going up is now more easy to predict than rain in Brittain.
Where are the steady buyers coming from?
More on that below.

We are going into lunar Green Period now, which normally calls for a rising market, but I am not going to buy because this market doesn’t feel ‘right’, and several technical indicators I use are signaling: SELL.
So, it wouldn’t surprise me if we get a rather weak Green Period, followed by more selling in the next Red Period in March.
If you want to take the risk and buy this Green Period, then at least use a very tight stop loss in the coming weeks.

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So what goes on propelling the stock market?
There are a number of reasons.

First of all, we have governments around the world borrowing and spending (or wasting) $trillions. Even if that money is wasted it always ends up in some pockets or other, because money cannot just disappear.
So we have to ask ourselves where does that money end up.
Well, most of that money simply ends up as ‘profits’ on the books of companies and banks.
Even though these are artificial profits, they do support the share prices.

Secondly, we also have the famous QE2 program going on, where the Fed is buying $600 billion worth of treasury bonds. What happens with this newly printed money?
Well, interestingly bond prices have declined sharply since the Fed announced their QE2. How is this possible? Shouldn’t bond prices go up if there is such a big amount of new buying coming in?
It can only mean one thing: large bond holders are taking this unique opportunity to unload a lot of bonds while prices are still high. When you know there is such a big buyer in the market you can sell a lot without crashing the price.
So these bonds holders suddenly got of plenty of cash on their hands, and they would not sell their bonds if they plan to invest in the very same bonds again. It would also not make sense to sell their bonds and then just sit on the cash earning almost no interest at all. So most of this $600 billion is probably flowing into the global stock markets, which have been gaining 5% per month, not a meager 5% per year.

More and more people are understanding this is going on, and this is creating the current one-way-street stock market, where every little dip is bought immediately.
When and where it will end is very hard to say, and also the astrological cycles cannot help us with that question.
But how it will end is easy to predict : in tears.

We do know that the QE2 program is scheduled to end around June, and there is a strong possibility that savvy investors will anticipate the end of this free QE2 money flowing into stocks, by starting to sell before everybody else does. That could lead to a sudden crash anytime between now and June.
The steady buyers can turn into steady sellers.

And that would only be the start of the problems.
The newly created money would then start flowing into real tangible goods driving up prices (which is happening to some extent already).
With the stock, bond and real estate markets overvalued and stagnating or even declining, and banks paying almost no interest on deposits, people start figuring out that the best way to invest their savings is by buying canned food, clothes, cigarettes and so on.. , all kind of things that are now going up at 10% per year already.
Company managements may realise that it makes more sense to stock up extra supplies (which are going up in price every month) , rather than keeping cash in their accounts where it earns almost nothing.
And this could feed on itself and create a sudden wave of hyperinflation. Possibly by 2012-2013.

Governments wants us to believe that the economy is recovering thanks to their policies, but is it?
A very simple calculation tells us it is not.
The size of the US economy is about $15 trillion per year.
The government plans to borrow and spend at least $1.5 trillion this year, so that is 10% of the overal size of the economy. Yet, they project only 3% economic growth for the year.
This means that with a balanced budget the economy would actually decline by 7%, and this shows you the true condition of the real economy.
A similar calculation can be made for the EU.
So, Western economies are actually continuing to decline by 7% per year, but the decline is being masked by the government’s lavish borrowing and spending.
It is not sustainable, so something got to give…

Be prepared.

Danny