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Another day, another rally on Wall Street. One day, the market rallies on reassuring words about liquidity from Mario Draghi or Ben Bernanke, another day from good news from the housing sector, the third day on good news from the industrial sector, and the fourth day on good news about the overall economy (e.g., Thursday's GDP revision and lower jobless claims). But how long the rally can last?

Major Equity Indexes

Index

Five-day Performance (%)

3-Month Performance (%)

12-Month Performance (%)

SPDR S&P 500 Trust (SPY)

1.4

8.1

11

Powershares QQQ Trust (QQQ)

1.3

3.8

5

SPDR Dow Jones Industrial Average (DIA)

1.1

8.5

8

As long as traders believe that the two drivers of the rally -- liquidity and fundamentals -- move in tandem with each other. That is, as long as the world economy continues to improve without an interest rate spike, which could be a long-time, for a number of reasons:

  • First, China's ongoing excess capacity continues to exert downward pressure on prices, keeping inflation-the primary variable that determines long-term rates under check.
  • Second, the pledge of Prime Minister Shinzo Abe to unleash a yen Tsunami provides a cushion for U.S. and European interest rates, as the newly-printed yen must be parked somewhere.
  • Third, the automatic spending cuts to take effect soon in Washington is music to the ears of Wall Street, as it will help keep the U.S. sovereign debt under control, diminishing the credit risk, another factor that influences long-term rates.

The favorable interest rates aren't good news for all asset categories, however, especially for precious metals, as the absence of an inflation spike and a rebounding dollar have been bearish for the metals (see previous piece).

Major Precious Metals ETFs/Stocks

ETF

Five-day Performance (%)

3-Month Performance (%)

12-Month Performance (%)

SPDR Gold Shares (GLD)

.8

-8

-10

like iShares Silver Trust (SLV)

.7

-15

-18

Freeport-McMoRan Copper and Gold (FCX)

-2

-16

-26

A few words of caution: A prolonged period of ultra-low interest rates provides fuel for the blowing of bubbles that eventually burst, costing investors who have been on the wrong side of the market dearly. The problem, however, is that none of us is so smart to predict when the next bubble will burst. That's why investors should always hedge their positions.

Source: How Long Can The Wall Street Rally Last?