My readers know that I pay more attention to market signals than statistics, which pour out of government agencies or private forecasting firms. If gross domestic product (GDP), employment and price data suggest an economic boom, but markets are flagging, I am a lot more worried about our financial future than your typical Washington econocrat is.
The opposite also applies. When markets are strong, but politicians, analysts and forecasters are screaming economic doom, I start to doubt the naysayers and let the actions of millions of traders give me an idea about where our economy is headed.
Since March 2009, a virtual cottage industry of doomsayers has emerged, forecasting U.S. and world economic collapse, currency wars, the end of the dollar as a reserve and a resumption of the “secular bear market” taking the Standard & Poor’s 500 to historic lows.
There is no end to TV interviews with pundits who think the market is due for a correction now that the S&P 500 has topped 1,500. Thanks a lot gentlemen and ladies. Aren't you the same clique that thought the market was overvalued two years ago at 1,200? Only global “warmingists” seem capable of ignoring contrary data for so long.
How do I read the markets? I don't need to show you charts: you can refer to them later using your own computer. I keep it simple. If a market is making a series of higher highs and higher lows, that is bullish and the trend is positive. Contrarily, if I see a series of lower highs and lower lows, the trend is negative and the market is telling you to be careful.
OK, let’s get out the scratch pad.
Since March 2009, the S&P 500 has brushed off “Eurostupidity” four times, making higher highs and lows, most recently this month.
BULLISH. Forgot howlers about GDP data. I know the recovery looks slow. Ask any employer swamped by Obamacare paperwork and thousands of new regulations: they'll tell you why. Bullish. Check!
The Dow Jones Industrial Average tells the same story. Bullish. Check!
Let me acknowledge my Dow Theory comrades and point out the Dow Jones Transportation Average has surged to new highs (and higher lows) on solid volume. Companies are shipping goods that aren't selling? Huh?
The technology stocks, shown by the Nasdaq and its tracking exchange-traded fund (ETF), QQQ, are laggards. But this is almost entirely due to Apple and Intel, companies with their own expansion and growth concerns. Other technology stocks (medical technology, for example, which is far more important than cell phones and video) are solid performers. We can call this a matter of concern, but only that. Not a check, but a tick to remind us to look further.
Now of course, if the economy has a bright future, we would expect some markets to perform poorly. Who wants to own stodgy U.S. government bonds, with their pathetic coupon payments, when the future is bright?
Well, dang me! Since April of last year, Treasury bonds have been tracing out lower highs and lower lows. A strong economy means rising interest rates. Would you want to be locked into today's pathetic Treasury yields until 2043? Of course not. But maybe you should ask the Chinese, who have been buying a few trillion dollars worth. The pundits say they are geniuses. Of course so were the Japanese in the
1980s. Check! Bonds say the economy is stronger, and that is bullish.
If inflation worries you, you have two kissing cousins to look at in the markets. One is Treasury Inflation-Protected Securities (TIPS). The TIPS ETF has not yet begun to trace out lower highs and lows. It continues in a rising trend. Since it is both a bond and inflation guide at the same time, it could be forecasting lower interest rates or higher inflation, or both. Can we resolve this issue?
In part, yes: we can turn to gold prices, a traditional harbinger of inflation and lack of confidence in the financial system. The SPDR Gold Shares ETF (GLD) has been tracing out lower highs since the summer of 2011, but it has yet to convincingly set a series of lower lows.
Putting this together, inflation-indexed bonds and gold are telling us the inflation outlook has yet to be determined. Will the trillions of dollars poured out by the Federal Reserve as part of quantitative easing come back to haunt us as sharply higher prices? I have a tripwire and price level for you to monitor closely. If GLD takes out the December 2011 low of 148.27, the story is complete: a stronger economy will continue to push stocks higher, and money will flow out of assets such as gold and U.S. government debt.
What about oil? Since the recession ended in March 2009, oil prices have gone up and down, but on balance they have gone nowhere. This is not surprising: new sources of oil liquids and natural gas are overwhelming increased demand as the economy recovers. In fact, low petroleum prices are the “stimulus,” not the Fed foolishness or budget negotiations. Check! Bullish.
Stay bullish. Stay optimistic. It is the hard thing to do. It is the right thing to do. It is the profitable thing to do.
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