Déjà vu in the S&P 500
Posted by Danny on July 7, 2014
Stock markets seem unstoppable. The Dow has broken above 17000 and the S&P 500 is closing in on the 2000 level, completely in line with the S&P scenario we posted two weeks ago.
The market setup is now a carbon copy of the one we had in late December (click for larger image):
Overhead resistance is in the 2000-2050 area. My technical indicators are unimpressed by last week’s rally and are signaling weakness ahead. This is not a setup I want to buy, the risk/reward ratio is too poor.
I think we will get a correction before the end of September. But I also think it will be brief. Money will pour out of bonds and into stocks as soon as we get anything that looks like a “correction”. Why? Bonds are most attractive when rates are high and about to go down. Bonds are least attractive when rates are very low and about to go up. So, once the Fed starts raising rates, bonds will become even less attractive than they already are. Where is that money going to flow? If it flows into stocks we will get a 1920s mania, and if it flows into commodities it will trigger high inflation. There is no graceful way out of the ZIRP+QE hole they have digged. Of course, they will conveniently blame “speculators” for the next round of problems.
For those who keep an eye on the 1920s scenario, the chart is now updated for June (click for larger image):
The correlation is now up to almost 91%. When will the scenarios depart? Same policies, same results? We will find out.