Can Central Bankers Keep Equity Markets Afloat?

 |  Includes: DIA, SPY
by: Joseph E. Meyer

Sell in May and go away. We've all heard it. But it's May, and the SPDR S&P 500 (NYSEARCA:SPY) is up over 2% in the first trading week of the month. Most of the reason for the support can be placed on the Central Banks of the U.S. and Europe. Since the European Central Bank (ECB) said it will back stop the sovereign debt markets, investors there know they have a buyer. The same goes in the U.S. The Federal Reserve is spending billions on mortgage backed securities, still keeping that old sub-prime debt afloat. The liquidity has found its way into equities, of course, because no one is finding yield in debt. So the question is whether Fed policy here and ECB policy there will do away with the traditional seasonality this summer.

Having traded to 14,887, the Dow has almost reached a key psychological level, which is 15,000. It's now around 50 points away from reaching that. The S&P 500 has finally traded over 1600. This market just won't quit!

But hold on. What comes up, we all know, must come down.

The Nikkei 225 Index traded to the level of 38,957 on December 29, 1989, but today the Nikkei 225 is currently trading below 14,000 at 13,694 on May 6. This is the best the Japanese can do? After all of the massive stimulus measures administered by the Bank of Japan for the past 24 years to lift their markets out of a vicious bear market, this the best the Nikkei can do?

Yes it is.

I believe we will follow the same pattern as Japan. Our equity markets have now become totally disconnected from economic reality. Unemployment is improving, that is true. But the reason the markets have gotten so far ahead of the physical economy is the Fed. We have a Fed bubble, and everyone knows it.

This is why I continue to view this equity market with caution at these levels and especially because of the seasonality factor. I think this is the time to once again prepare for lower prices ahead. If you want to be a buyer, wait for the sell-off. At some point soon, we will see a resumption of what I think is a secular bear market.

Watching the Moving Averages

The current Dow 200-day moving average is at the 13,569 level, and the 50-day moving average is in the 14,457 area. The current 200-day moving average of the S&P 500 Index is at the 1,460 level, and the 50-day moving average is in the 1,552 area. Looked at from the top down, the U.S. equity market is a buyer's beware market. Look for those moving averages to fall 100 points or more before you start trusting the Fed and ECB to keep this thing afloat this summer.

Macro Bets

I take a top-down view of the markets, so investors who like my take can either discuss this with their financial advisor about where to go from here, or can pick from the high volume exchange traded funds that track an index. My preferred way is to look at the macro picture, then find a firm that is great at stock picking in a particular sector or country.

For broad strokes, I still like the energy sector, particularly natural gas. Also, as a play on U.S. demand, rail stocks and utility companies for seasonal defense.

I'm also thinking that the precious metals mining sector shares look pretty washed out and in the long term represent good value from here. Investors should go through the pick of the litter for the large integrated oil companies as a total return strategy to the market.

Worth Noting

  1. Since 1929 we have had 25 bull markets. The average one lasts 31 months. This one has been going on since March 2009, or 50 months.
  2. The average bull market gain since the Great Depression is 104%. The smallest of those bull market gains occurred in 2001: 21%. The largest was a 582% gain between 1987 and 2000. The 2009 bull market has doubled in three years. Sector selection and/or stock selection is key to remaining invested in this market.
  3. The S&P 500 lost 52% of its value in 13 months in 2008. Remember, fundamentals can change quickly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.