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Can you believe it has only been a little over two years since we thought the end was near? Two years since we thought that we were on the brink of another great depression? Two years since we thought that the entire American financial system was going to collapse and take the entire world with it? And two years since the start of one of the greatest bull markets ever? In those two years however, nothing has been bullish besides the financial markets. Everything rallied; stocks, bonds, commodities, corporate earnings. Everything but the developed economies.
Despite out performance from relatively every financial market over the last two years, unemployment stayed stubbornly high, GDP grew sluggishly and -- despite billions of dollars being added into the system -- we were actually worried about deflation. Yet the stock market at least has ignored any kind of bad news for the last two years, and is now sitting at the same level it did in July 2007, right before shit started hitting the fan.
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From a pure technical standpoint, S&P is at a critical resistance level. If it maintains the break of the 1333 level -- which is exactly 100% above the march lows -- it could head up to 1435, which would be the next point of resistance.
How likely is this? That depends on what is driving the market. Corporate earnings were overall pretty good once again, and economic activity has finally started to gain strength after a relatively weak 2010. A move to 1435 from here means another 7.5% gain in the S&P. If you look at the way the markets have been recently, that really shouldn't be a problem. However, this 7.5% move-- if spread out over 2 months or so-- could meet some significant resistance from a fundamental point of view.
The thing that worries me most about the markets right now is something that comes up in the news every now and then, but isn't getting as much attention it should. And that is the treasury debt limit. It's been raised 10 times in the past 10 years, but never has it been as significant as it is right now. In the past, either the economy was booming and we weren't on the brink of bankruptcy to worry about the debt limit, or -- as it was for the last two years -- the executive branch and the legislative branch were from the same party, so compromise was not difficult to reach.
Let me remind you, it is very possible for the government to shut down. And if that does happen in the next few months as the the treasury debt limit is reached, there could be a significant flee from the stock market and the bond market, especially with how burning hot equities have been.
So if you are looking to get into equities now and you have completely missed out on the recent bull market, I would say ask your self if the risk you are taking for an additional 7.5% upside is really worth it. In the long run, I am extremely bullish on equities. Easy money will continue to push up the price of everything in the world, along with equities. However, I would think twice if I was to go long equities at this point in time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.