The start of a big move
Posted by Danny on May 18, 2015
Stocks have continued to push higher and are close to new record highs once again. We remain in a lunar green period until later this week, so chances are we will climb to new highs in several major market indexes. Let’s have a look at the Nasdaq chart (click image to enlarge it):
The Nasdaq appears to be breaking out from its large rising wedge pattern. The breakout is to the downside, but we start seeing signs that the market is reversing already, potentially handing us a failed breakout. If the market is really weak, we should have seen a drop to the 4800 support level before seeing some rebound attempt. But buyers didn’t even wait for 4800 and already stepped in at 4900. That is a sign of strength and must be frustrating traders with bets to the downside.
We are still likely to get a big move within the next months, but the odds are increasing that the move will be up rather than down. I now estimate about 60% chance that the move will be up. What could trigger another big rally? Well, bonds have seen a significant global sell-off in recent weeks. That means that all the QE related buying in the world was easily overcome by even larger bond sales. What are those sellers going to do with their new cash? Put it back into the bond market are near zero yields? Not likely. Some of that money is going to find its way into stocks, especially if they break out to the upside after almost 6 months of sideways action.
When ultra low rates start being seen as something semi-permanent the average p/e level of stocks tends to climb to 30 rather than its more normal 15-20. At some point retail investors start realizing that bonds yielding 2% are basically trading at a p/e of 50 , so stocks with a p/e of 20 start looking comparatively cheap. When small investors start selling bonds and buying stocks we will have entered the last explosive stage of a long bull market.