I have to admit it, I love conspiracies. I have been trading on a near-daily basis since the mid-1990's. I have made some excellent trades, and I have made some disastrous trades. I submit to you, that some of my disastrous trades might not have even been my fault! Oftentimes, I would be long a stock, have a decent gain, and I would prudently place my stop about 8% below its current level. Then one day it would trade down huge on no news, maybe 12 or 15% or more, my stop would be hit, I would eke out a small gain or maybe even take a small loss. By the end of the day, the stock would have recovered and after hours there would be a huge spike up on some sort of positive news release. The stock would open up the next day +20%. Sound familiar? It was a weekly occurrence in the mid-to-late 90s. So what in the hell was happening? Somebody KNEW SOMETHING! But that couldn't happen in the Good ol' U.S. of A could it? I mean after all, we have multiple 3 letter agencies to prevent this sort of thing from happening right?
I have been watching this market trade up since March 2009. I didn't buy in until the summer of 2009. My day trading days are long gone (at least until I can afford my own co-located server on the exchange and high frequency trading algorithm), I'm more of a position trader now. Everyone, and I mean everyone, is now fully aware that the market is being supported by the Fed. By even suggesting that the Fed was behind the rally a couple of years ago, you would have been subjected to ridicule as a tinfoil hat wearing conspiracy theorist. Today, even the mainstream financial news channels mention it almost daily. So we'll assume that the biggest whale in the world located in the Marriner S. Eccles Building is in the market, and they are LONG. I picture the United States' economy as being a stumbling engine in a car with about every indicator light on the dashboard lit up. The Fed's monetary policy is the can of ether being sprayed straight into the carb to try to get the old heap running again.
Read the various comments on different financial websites and you will soon find out that this is indeed "the most hated rally ever," a phrase attributed to CNBC's Bob Pisani in August of 2012. Many Americans point to joblessness, rising numbers of Americans on disability, and poor earnings results as reasons to be bears. Every single drop of over 100 points on the Dow and the message boards and Twitter feeds explode with people calling a top in the market and that the long-awaited crash is finally here. Then the 3:30pm ramp arrives right on schedule and the market recovers well off its lows. While my gut feeling agrees with the bears, many painful trading experiences have taught me to not listen to my gut. Are things REALLY that bad? Let's look under the hood of this old jalopy to see if the economic engine of the United States has finally stopped sputtering and has started idling smoothly.
There are two main aspects of the United States economy that must be remembered. Recall that the United States has switched from a manufacturing economy to a consumer-driven and services economy. So let's start there. Consumer Spending makes up a whopping 71% of total GDP!
Personal Consumption Expenditures have not only surpassed the level of spending at the market peak of 2007, but have far exceeded it. The largest component of GDP is on a tear. If there's one thing we can count on, it's that Americans will continue to spend and spend, regardless of whether they have the money or any intention to pay it back.
A less well-known measure that I personally monitor is the Final Sales to Domestic Purchasers. It is the level of gross domestic purchases less the change in private inventories. It is more reflective of the willingness of both households and businesses to spend. You can quickly see why this is one of my favorite economic indicators as weakness in 2000 and leading up to 2007 foretold the dot-com crash and the financial crisis. While showing slight weakness at its current level (peaking in July 2011), it appears to be leveling off, I will be watching this indicator closely.
Sticking with our premise of spending and GDP, let's take a look at the housing market. Never underestimate the economic importance of housing. Home ownership is one of the primary drivers of the American economy and part of the American Dream. In housing, we will be looking at Single Family Housing Starts. Buying a house is the largest expense in the lives of most Americans. Responsible Americans wouldn't even consider building a house unless they were confident of a brighter future. It is perhaps the ultimate gauge of consumer confidence.
As the chart shows, after a long and brutal slide, Housing Starts has bottomed and is resuming its uptrend.
Lastly let's take a look at a measure of overall market breadth for this rally. The Russell 3000 constitutes almost the entire investable stock market. Over 2/3's of the entire market is in greater than 60% of its yearly range, and over half is greater than 80%!
Based on the above economic indicators and proprietary indicators, I am still long this market, mentioned first here. I will continue to monitor the above economic and market indicators and many others until the weight of the evidence switches to a bearish condition.
Oh and back to those conspiracies. On April 10, the Fed "accidentally" sent minutes of its March 19-20 policy meeting to an e-mail distribution list of congressional staffers and trade lobbyists. A quick perusal of who exactly is on that e-mail list can be found here. Now if only I could get on that list!