10 Reasons Why Stocks Bounced Back So Hard

Includes: DIA, IWM, QQQ, SPY
by: The Mad Hedge Fund Trader


Following the advice of another newsletter that I won’t mention, a friend told me he bailed out of all his stocks at the February 11 bottom.

Despite market volatility doubling, multinationals getting crushed by the weak euro, and the Federal Reserve now on a rate rising path, the major stock indexes are just off their highs.

Why the hell are stocks still going up?

Editor's Note: Article originally published March 16, 2016.

While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.

Following the advice of another newsletter that I won't mention, he bailed out of all his stocks at the February 11 bottom. After all, wasn't the Dow Average headed straight to 3,000?

Despite market volatility doubling, multinationals getting crushed by the weak euro, and the Federal Reserve now on a rate rising path, here we are with the major stock indexes just short of all time highs.

Why the hell are stocks still going up?

I paused for a moment as a kid driving a souped up Honda weaved into my lane on Interstate 80, cutting me off. Then I gave my friend my response, which I summarize below:

1) There is nothing else to buy. Complain all you want, but US equities are now one of the world's highest yielding securities, with a lofty 2% dividend. A staggering 50% of S&P 500 stocks now yield more than US Treasury bonds (NYSEARCA:TLT). That compares to two thirds of all developed world debt offering negative rates and US Treasuries at 1.90%.

2) Oil prices have bottomed, but remain incredibly low, and the windfall cost savings are only just beginning to be felt around the world.

3) While the weak euro (NYSEARCA:FXE) is definitely eating into large multinational earnings, we are probably approaching the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US exporters.

4) What follows a collapse in European economic growth? A European recovery, powered by a weak currency. European quantitative easing is working.

5) What follows a Japanese economic collapse? A recovery there too, as hyper accelerating QE feeds into the main economy. Japanese stocks are now among the world's cheapest. The Japanese yen (NYSEARCA:FXY) will probably FALL for the rest of the year, adding more fuel to the fire.

6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&Ls for a very long time. We might see a ¼% hike and then done, and that probably won't happen until the second half of 2016. In a deflationary world, there is no room for more. At least, that's what my friend Janet tells me.

This will make absolutely no difference to the large number of high growth corporations, like technology firms, that don't borrow at all.

7) Technology everywhere is accelerating at an immeasurable pace, causing profits to do likewise. You see this in biotech, where blockbuster new drugs are being announced almost weekly.

See the new Alzheimer's cure? It involves extracting the cells from the brains of alert 95 year olds, cloning them, and then injecting them into early stage Alzheimer's patients. The success rate has been 70%. That one alone could be worth $5 billion. I might be a user of this cure myself someday.

8) US companies are still massive buyers of their own stock, over $200 billion worth in 2015. This has created a free put option for investors for the most aggressive companies, like Apple (NASDAQ:AAPL), IBM (NYSE:IBM), Exxon (NYSE:XOM), Wells Fargo (NYSE:WFC), and Intel (NASDAQ:INTC), the top five repurchasers. They have nothing else to buy either. American International Group, Inc. (NYSE:AIG) has mandated the repurchase of an amazing 25% of its outstanding float.

They are jacking up dividend payouts at a frenetic pace as well, and are expected to return more than $430 billion in payouts this year.

9) Oil has bottomed, making the entire energy sector the "BUY" of the century, dragging the indexes up as well, even though it now accounts for only 5% of total market capitalization. This is why I made energy my number one performing pick this year.

10) Ditto for the banks, which were dragged down by falling interest rates for most of 2015. Reverse that trend this year, and you have another major impetus to drive stock indexes higher.

My friend was somewhat taken back, dazzled, and nonplussed by my out of consensus comments. He asked me if I could think of anything that might trigger a new bear market, or at least a major correction.

The traditional causes of recessions, oil price and interest rate spikes, are nowhere on the horizon. In fact, the prices for these two commodities, energy and money, are near all time lows.

Then I thought of one big one. Donald Trump could get elected president in November.

With that, I told my friend I had to hang up, as another kid driving a souped up Shelby Cobra GT 500, obviously stolen, was weaving back an forth in front of me requiring my attention.

Where is a cop when you need them?

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.

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