In a bull market, be bullish

The title of this post is one of the most important statements in all of Jesse Livermore’s great book “Reminisences of a Stock Operator” but it is also one of the hardest market axioms to adhere to because often rhetoric gets in the way. Often economic reality gets in the way or often our personal biases get in the way.

So the news that stocks have touched their highest level since 2007 with all the bad news and unemployment in the globe is clearly going to be incongrous to many people.

S&P 500 Chart

But as you can see in the chart above the S&P 500 has had periods of weakness over the past few years but if you take a step back and look at the big picture it now approaching the 4th year of a bull market – even if it is within the overall “sideways” market that has been occurring since 2000. This is what The Prince often terms as the difference between a “cyclical” bull market and “structural” bull market.

This is of course the aim of zero interest rates and unconventional monetary policy, expanding central bank balance sheets goose stocks for long enough get money allocated away from savings and put to work and get rates low enough so business can take a few risks and hire people.

Fed goosing stocks

You can see in the chart above of Fed Credit Balances against the S&P 500 and the performance of the market when the Fed’s balances were expanding and when they were static or contracting. Expanding equals stocks up. Static or falling equals stocks down. So the Fed’s current purchases of bonds and its helicopter drop in the economy is likely to do the job.

And perhaps the Jobless Claims data we saw overnight, which showed a fall to 335,000, could be suggestive of an improving employment outlook in the long run. As you can see in the chart below this data seems to be vitally important for the health of the stock market.

S&P 500 v Jobless Claims

I never thought to plot jobless claims against the market but I have seen Joe Weisenthal from Business Insider wax lyrical about this chart many times and as you can see it seems to have a pretty good track record. Which of course makes sense, an improving employment market feeds into economic activity very strongly and with a high multiplier for each additional job created.

So put simply for the moment there is little selling pressure in US equity markets.

s&p 500, spx, s&p 500 chart

And as you can see in the weekly S&P 500 chart above the market is not stretched by any sense in terms of my usual technical indicators.

Clearly I need to remember what Jesse Livermore said “its a bull market son”. Yet I remain skeptical.

Because at some point the positives of the improving employment situation are going to collide with the positive of the Fed’s unconventional policy of buying bond after bond after bond is withdrawn. We know that point – it is 6.5% US unemployment and we know the Fed will cease its money drop.

So we know  where the risk to stocks will come. It’s just the timing we don’t know and the big question is whether the market will have enough self sustaining momentum to continue higher on its own without the Fed. It is then that we will know if this is a cycilcal or structural bull market.

But that time is not yet come.

 

Latest posts by Deus Forex Machina (see all)

Comments

  1. Shares are such a good investment that they seem to crash 50% every 5 years, obviously we are due for another one soon.

    personally I would not bet 50% of my saving that the crazy GOP will be reasonable concerning the debt ceiling.

  2. “This is of course the aim of zero interest rates and unconventional monetary policy, expanding central bank balance sheets goose stocks for long enough get money allocated away from savings and put to work and get rates low enough so business can take a few risks and hire people.”

    Translation

    People who want to save being forced,by manipulated rates, into stocks and debt / asset speculation.

    Businesses making decisions that would not make sense but for near ZIRP money.

    A very sound basis for confidence!

    The only problem seems to be that all these smart phones and tablets are plugging too many people into what is really going on.

    The lever pullers are getting frustrated.

    • What about the purchasing power of the dollars made over time. You make the bull market gains from ZIRP but what physical assets can your profits buy you at the time you cash in?

      • Therein lies another good question – In the Big Picture, who exactly is making bull market gains from ZIRP? Households? Small businesses? Because at the end of the day, if the only folks making bull market gains are the primary dealer first recipients of ZIRP accounting entries, and some professional traders, while households and small businesses slowly go broke, then what exactly has been gained for the economy (and society) as a whole?

        • Indeed, considering business are struggling to find rational reasons to invest in real economic activity and households are also reluctant to spend the idea that booming stock prices will do much of substance places too much confidence in the ‘wealth effect’ fairy – the equally fanciful sibling of the confidence ‘fairy’.

          Both creatures are part of the nonsense peddled by the Merchants of Debt as part of their ‘The World need more Debt’ trope.

        • I see a hint of the answer to my question resides in today’s other thread, on the US housing “recovery”. Who’s buying, en masse, at rock bottom prices? Black Rock, and other in-bed-with-the-Fed types. Same as it ever was.

          Ban usury. Problem solved.

        • Deus Forex Machina

          Bernanke has argued that his unconventional policies have lifted US GDP growth by some percentage over an above what it would have been without it.

          Can’t remember the number so my apologies.

          So he genuinely believes that main Street directly benefits from all the bond buying.

          • “So he genuinely believes that main Street directly benefits from all the bond buying.”

            Hmm.What BB genuinely believes is between him and God – maybe a few others. With the derivative black holes from the GFC still sitting on every major NY Bank’s balance sheet , all the US has managed to do is defer accounting reckoning by doctoring up FAS157 so these toxic “assets” can actually have some accounting value. The Fed provides the topping up to make the Banks solvent.

            It’s a precarious situation. The Fed is playing a waiting game here propping up the US financial system while waiting for the public to slowly forget and their risk loving human nature to kick in.

            It doesn’t mean you can’t make money at it. But, best to understand the game your in.

          • Takes us back to the discussion on what (if any) is the actual relevance of using “GDP” as a measure, doesn’t it? No doubt the “GDP” (ie, total transactions) figure will increase when the banks are given trillions in fresh accounting entries to pump & dump in various casinos/markets at their leisure. Doesn’t necessarily translate into an increase in small business activity.

          • Clearly, Bernanke is targetting *confidence*, by any means at his disposal and more. In doing so he is successfully creating the illusion of growth in order to inspire.

            IMO it is all a very elaborate prop. But, there are different ways to play that while recognising the intrinsic risks with the construct.

  3. It’s been a bull market, I’ll give you that. But within the context of a 13 year old bear market / trading range.

    Given that the S&P is now nearing the top of that range, and indeed last night in a thing of remarkable beauty closed on a confluence of resistance at multiple long term trend lines, now is not the time to be buying stocks. Maybe (maybe) if the market beats those 2007 highs, though I’ll be surprised if that happens.

    Interested in those trend lines? Check out the January report at Peter Eliades’ stockmarketcycles.com

    Costs a few $ to view it so you’ll have to make your own mind up whether to do that. Happily he has discovered some of the same trend lines I have been following at http://www.avidchartist.com but there is a whole lot more to his work.

    Needless to say, no matter how beautiful or compelling the set up, the stock market will do as it pleased, so make your own decisions and manage your risk.

    • Deus Forex Machina

      “It’s been a bull market, I’ll give you that. But within the context of a 13 year old bear market / trading range.”

      Yep agree 100%

      Not saying its about to kick off for a huge run just recognising for all the rhetoric it just keeps keeping on largely because of the Fed but the Fed is still buying.

      When it stops or the market thinks it will stop – well that’s probably when we’ll get the signals to sell even if we miss the absolute top

      • “When it stops or the market thinks it will stop – well that’s probably when we’ll get the signals to sell even if we miss the absolute top”

        Sorry to disagree: What is more likely to happen based on much previous experience is that you & everone else in Australia will wake up one morning to an overnight freefall!

        The Share Markets especially in the USA which leads World behaviour are totally Govt rigged & as others have mentioned.It is 90% Govt + Hedge Funds- Joe sixpack is mainly out!

        There is a Bull Market -going on now for 10 straight years & good for a few more. GOLD!

        • “…Joe sixpack is mainly out!”

          Well, except for the big institutional fund managers gambling with Joe Sixpack’s retirement savings in said rigged casino.

        • Deus Forex Machina

          Gold made its highs in August and September 2011 and has been trading down to sideways since – doesn’t mean my view it’s going lower in time may not be 100% wrong but at best its consolidating at the moment.

          Perhaps for another surge perhaps not – who knows.

          As regards my comment the signals I refer to are my trading signals – so hopefully they work as well as they have for the past 25 years and I don’t wake up to a surprise – but then again nothing is guaranteed in markets.

          Not bull runs and not systems that have worked in the past

  4. Thanks DFM, this is a useful post for putting the last few month’s price movements in context.

  5. “This is of course the aim of zero interest rates and unconventional monetary policy, expanding central bank balance sheets goose stocks for long enough get money allocated away from savings and put to work and get rates low enough so business can take a few risks and hire people.”

    This carries the sense of dogma to me. Not convinced the reality bears it out. Yes, the stock indexes are up in notional terms. But is there evidence of “money allocated away from savings”? That is, in the context of the broader economy, and not just primary dealers selectively “investing” their trillions in free ZIRP cash?

    Is there any evidence of households taking increased savings and throwing it to the wolves at the stock market?

    Is there any evidence of increased loans to US businesses?

    • Deus Forex Machina

      It’s not Dogma it is the theory behind the practive _ I’m neither supporting nor attacking the practice simply reporting on what Bernanke is trying to achieve

      Whether it is successful can only be known in hindsight but as noted above in my other reply to your point Bernanke thinks it is working.

      • I reckon the theories that most economists cling to are fairly described as dogma. We rarely see one recant their core beliefs. Even in the face of clear and often overwhelming evidence.

        It is BB’s job to tell us it’s working – in standard opaque, butt-covering CB’er speak – even if it’s not actually working. It’s all about creating and maintaining “con-fidence”, remember? 😉

      • Deus Forex Machina

        I think Leisman has some good points but I do like the end of that ZH article

        “there are some people who are misguided and believe that the Fed still has some capacity to tighten, or even stop expanding its balance sheet, without destroying that house of cards – the S&P500/Russell 2000/DJIA – it has so carefully and lovingly created over the past 4 years.”

        This is the big question as posed in y piece I reckon and the skeptic in me says it is going to be very difficult.

  6. “.. We know that point – it is 6.5% US unemployment and we know the Fed will cease its money drop.”Do we? How do we know that? Because the Fed told us so…..how quaint….

    • Quite, Janet.

      We indeed shall see. Deprived of their free lunch, the Bankster gamblers may just decide that the risks to “their” money may indeed be too great and retrench their stakes in stocks. If that were to happen it is extremely doubtful the Fed would sit idly by.

      QE infinity is where we are. And Gold is starting to again respond to it.