Market Commentary

While the US Equity Indices have broken out above recent highs to continue their up-trend, I hear traders complain that this hasn't been an easy market to trade.

Here is a daily chart of the S&P 500 Index.

On one hand, you'd think that a straight-shot bull run higher would feel as safe as the kiddie rides at the amusement park. On the other hand, sagging internal breadth, divergences, and the impending end of QE2 have triggered cautious instincts in many professional traders. As a result, many are selling strength, and end up under-invested during the next push higher.

It's been even more challenging for the Bears, who keep trying to identify and sell a top in this market. However, there's been little selling follow-through. My guess is that because so few people are fully invested in the equity markets, each dip (no matter how small) seems like a buying opportunity to someone.

So, how long can the markets continue to produce these straight up moves to new highs? While the answer would seem to be "indefinitely", we know that's not realistic either. This seems a lot like the market did from December through February, where we barely saw a red day; but you couldn't help wondering each day if this was the top.

A Little Politics and Economic Policy.

On a side note, Fed Chairman Bernanke held a press conference last week. It was the first ever press conference immediately following a Federal Reserve meeting.  Historically, the Fed has released minutes of their meetings about three weeks afterwards. Now, they expect to hold these sessions after every meeting.

On the surface, Bernanke's comments reiterated that the Fed was resolute in their intent to stop QE2 and doesn't desire to reverse the current trend of inflation or a weakening dollar. What caught my eye, however, was how Gold and Silver spiked as he spoke.

It is worth noting that the U.S. Dollar has fallen 31% so far this year compared to Gold. Likewise the Dollar has fallen 25% against the Swiss Franc (which many consider the gold standard of Fiat Currencies). For what it is worth, the Dollar Index is barely a percentage point above the all-time lows set before the financial panic in 2008.

While the US Equity Indices have broken out above recent highs to continue their up-trend, I hear traders complain that this hasn't been an easy market to trade.

Here is a daily chart of the S&P 500 Index.

On one hand, you'd think that a straight-shot bull run higher would feel as safe as the kiddie rides at the amusement park. On the other hand, sagging internal breadth, divergences, and the impending end of QE2 have triggered cautious instincts in many professional traders. As a result, many are selling strength, and end up under-invested during the next push higher.

It's been even more challenging for the Bears, who keep trying to identify and sell a top in this market. However, there's been little selling follow-through. My guess is that because so few people are fully invested in the equity markets, each dip (no matter how small) seems like a buying opportunity to someone.

So, how long can the markets continue to produce these straight up moves to new highs? While the answer would seem to be "indefinitely", we know that's not realistic either. This seems a lot like the market did from December through February, where we barely saw a red day; but you couldn't help wondering each day if this was the top.

A Little Politics and Economic Policy.

On a side note, Fed Chairman Bernanke held a press conference last week. It was the first ever press conference immediately following a Federal Reserve meeting.  Historically, the Fed has released minutes of their meetings about three weeks afterwards. Now, they expect to hold these sessions after every meeting.

On the surface, Bernanke's comments reiterated that the Fed was resolute in their intent to stop QE2 and doesn't desire to reverse the current trend of inflation or a weakening dollar. What caught my eye, however, was how Gold and Silver spiked as he spoke.

It is worth noting that the U.S. Dollar has fallen 31% so far this year compared to Gold. Likewise the Dollar has fallen 25% against the Swiss Franc (which many consider the gold standard of Fiat Currencies). For what it is worth, the Dollar Index is barely a percentage point above the all-time lows set before the financial panic in 2008.

Gold continues to receive the headlines, yet silver is really moving.

Bespoke posted a chart that highlights how remarkable silver's run has been.

Had you invested $100 in silver ten years ago today, your investment would now be worth $1,037.  A $100 investment in gold would be worth about half that at $569, and a $100 investment in the stock market (S&P 500) would be worth just $107.48.

Here is what Jim Rogers thinks about silver's move.

For more on that, here is a link to an article where he reminds that parabolic moves always collapse.

Gold continues to receive the headlines, yet silver is really moving.

Bespoke posted a chart that highlights how remarkable silver's run has been.

Had you invested $100 in silver ten years ago today, your investment would now be worth $1,037.  A $100 investment in gold would be worth about half that at $569, and a $100 investment in the stock market (S&P 500) would be worth just $107.48.

Here is what Jim Rogers thinks about silver's move.

For more on that, here is a link to an article where he reminds that parabolic moves always collapse.

Newsweek had a great cover:  "Apocalypse Now". Think about it, Tsunamis, Earthquakes, Nuclear Melt-Downs, Revolutions, Governments on the Verge of Shutting-Down …

And, yet, despite a cavalcade of horrors … the markets have held up well.

Is This as Good as it Gets?

Barron's notes:

Having snagged its best first quarter since 1998, the U.S. stock market began April on a hopeful, if hesitant, note, encouraged by evidence that our economy is improving, but a little fearful that this may be as good as it gets.

On Friday, the Dow Jones Industrial Average nudged briefly above its recent February peak to reach its highest level in nearly three years, effectively brushing aside recent concerns such as high oil prices, flailing European banks and disruptions in the wake of Japan's disaster that had so alarmed investors mere weeks earlier.

Are Cracks Starting to Show in the Rally's Foundation?

Bloomberg posted a chart showing the bull market move put in by the S&P 500 Index.  Note, however, the dwindling volume of shares traded, especially since prices rebounded off lows earlier this year.

Barry Ritholz notes "Fed induced rallies tend to be liquidity, not conviction driven. Thus, the anemic volume".

Breadth is Starting to Show Signs of Fatigue as Well. 

The following chart shows the percent of stocks trading above their 50-Day Moving Averages.

 
In strong markets, this indicator goes up as price rises.  However, as the market rally loses momentum, this indicator starts tracing-out lower highs.

So what do you do?  With the charts shown above and QE2 is supposedly ending in June … price is still the primary indicator.  Until sellers show up with conviction, the liquidity rally is likely to continue.

Newsweek had a great cover:  "Apocalypse Now". Think about it, Tsunamis, Earthquakes, Nuclear Melt-Downs, Revolutions, Governments on the Verge of Shutting-Down …

And, yet, despite a cavalcade of horrors … the markets have held up well.

Is This as Good as it Gets?

Barron's notes:

Having snagged its best first quarter since 1998, the U.S. stock market began April on a hopeful, if hesitant, note, encouraged by evidence that our economy is improving, but a little fearful that this may be as good as it gets.

On Friday, the Dow Jones Industrial Average nudged briefly above its recent February peak to reach its highest level in nearly three years, effectively brushing aside recent concerns such as high oil prices, flailing European banks and disruptions in the wake of Japan's disaster that had so alarmed investors mere weeks earlier.

Are Cracks Starting to Show in the Rally's Foundation?

Bloomberg posted a chart showing the bull market move put in by the S&P 500 Index.  Note, however, the dwindling volume of shares traded, especially since prices rebounded off lows earlier this year.

Barry Ritholz notes "Fed induced rallies tend to be liquidity, not conviction driven. Thus, the anemic volume".

Breadth is Starting to Show Signs of Fatigue as Well. 

The following chart shows the percent of stocks trading above their 50-Day Moving Averages.

 
In strong markets, this indicator goes up as price rises.  However, as the market rally loses momentum, this indicator starts tracing-out lower highs.

So what do you do?  With the charts shown above and QE2 is supposedly ending in June … price is still the primary indicator.  Until sellers show up with conviction, the liquidity rally is likely to continue.