Monday, February 21, 2011

Looks like an artificial rally

The S&P 500 index has been almost perfectly confined to an extremely narrow and straight rising channel pattern for the past six months.
Are we supposed to believe that this calm rally has continued through (1) a major shift in power in Congress, (2) an escalating series of collapsing governments in the Middle East, and (3) only the first of dozens of economic implosions at state capitals?

I don't buy it for a second.

Obviously stock prices did follow this pattern, but I don't think the collective action of mutual fund managers, day traders, hedge funds and individual investors could produce such a regular pattern for so long. I don't think the normal forces of supply and demand, buying and selling, or bidding and asking are at work here.

The good news is that, in the long run, it won't matter whether or not this overpriced rally was caused by illegal price manipulation or not. The higher the stock market goes into bubble territory, the harder it will eventually fall, and the more money I can make with a bear fund like HDGE when the time comes.


Cathy said...

Time for those bear funds?

Jody Wilson said...

Nope. Two down days does not a bear market make.

The Western Chauvinist said...

OK - remember that exchange we had a couple weeks ago about "wealthy investors" increasing belief that a crash is possible within the next 6 months? This post is why I've stayed out of the market. I just don't believe the underlying economics support the sort of market "rally" we've been seeing and so my middle-class investor sentiment matches that of the "wealthy investors" and then some!

I think a crash is not only likely, but unavoidable sometime within the next year or two. The federal government is deficit spending the mean annual income every *second* of every day, which it is squeezing out of private sector savings and investing - aka *future prosperity.*

I'm sure there's money to be made in bear funds, assuming the whole system doesn't collapse. We're in economic recovery like Obama is a moderate... NOT! We're Greece, only a lot bigger. And, as the saying goes, the bigger they are...

linc campbell said...

The rise correlates well with QE2, just as it did with QE1. Anyone not riding the up trend is losing money just as those riding the coming down trend will. Follow the trend rather then bank on armeggeddon.

Jody Wilson said...

I generally agree that it pays to follow the stock market trend. However it's not at all obvious that the stock market's rise correlates with specific rounds of quantitative easing (QE1 and QE2). The bulk of QE1 occurred between November 2008 and March 2009, when the S&P fell from around 900 to around 700. In fact, the market finally turned around for good when QE1 was mostly finished.

I think it's the amount of money created out of thin air - and resulting inflation - that will determine the stock market's future, rather than exactly when the money is created. If the Fed continues to create a trillion dollars or more per year, then I agree that it would ultimately create an inflationary bull market.