David Fry's Daily Market Outlook

The champagne's on ice. Advertisers are lined-up. Copy has already been written pronouncing the "official" end to the bear market of 2000-2002. And I guess we just need one more day as September and window-dressing ends. The party may be postponed until tomorrow so just get more ice.

The stock market's health for mainstream investors and the financial media is measured by the DJIA. As we flirt with record levels there it's important to remember that other equity indexes still have a ways to go. The important thing for bulls is the DJIA is the headline and a new high will affect psychology positively.

The current psychology among institutions is to put all the previous bad news (housing, energy, inflation, Iran and so forth) investors were dwelling on either off to the side or in the rear view mirror and focus on the positive tape action.

This August/September rally is similar to the previous two years when markets sold-off heavily in the spring only to rally back as dip buyers stepped-up. The little noticed phenomenon that occurred during this period was the tremendous increase in the money supply while the Fed was raising interest rates. (To avoid noticing this M-3 was eliminated from view this spring.) But as has been endlessly pointed-out here, some talented folks at www.nowandagainfutures.com have recreated it.

With trading desks, hedge funds, and corporations awash in liquidity provided by a generous ("your tax dollars at work!") Fed, it's been easy to keep markets moving higher.

Just where did the funds come from to push stocks to previous highs this week? Not from Main Street -- that's for sure as noted here. As was noted two weeks ago, the Fed injected nearly $65B (chart courtesy of Jesse) in funds via repurchase agreements from September 18 through today. If a new high is made and trumpeted in the media perhaps Main Street will add funds -- maybe, maybe not.

It's important to respect the tape. Mr. Market has been hijacked by a lot of money. It's frustrating to many, but it's reality. No matter all the stock pumping you hear/read to the contrary, stocks aren't historically cheap. But given today's financial realities there's literally "more money than brains" running the show.

Disclaimer: ETF Digest maintains positions in S&P 500 Index (SPY) and iShares Lehman 7-10 Yr Treasury Bond ETF (IEF).

Comment on this article

Comments

[kkin365:]

A couple of days ago, I took a CBOE course on index options, but do not know how to proceed. Your graphs clarify greatly. omooc

2006 Sep 29 08:44 AM

[Ricardo Arroja:]

Great article Dave!

For years it has been rumoured that the FED and the Treasury are active participants in the stock market. Now, after denying the public to know where M3 stands, it seems clear they are probably doing whatever they can to leverage stocks. Ironically, I think Bernanke is right to be a dovish central banker. He knows that the US economy needs a permanent wealth effect to keep spending afloat. In the late 90's, it was the Nasdaq. After the new millenium, there was nothing and Greenspan/Bush had to rush to emergency actions to avoid a recession. In the process, Greenspan created a Housing market wealth effect. Now, with New Home Sales down 20% YOY, the FED will attempt to lift stocks and create a stock market wealth effect once again. Bernanke is fully aware that with Housing already down and heading lower, stocks HAVE to be positive. If that other shoe drops as well, add in all the private and public debt built over the years, it will be 1929 or 1987 again.

The problem is that in an effort to prevent a BIG disaster from happening, the FED and the Administration will just delay it until one day the disaster becomes HUGE. Let's face it: most governments are bankrupt, most people are bankrupt as well. However, because of on-going credit, both have yet to realize that. Eventually, the party will be over. When that happens, we will have a serious crisis of DEFLATION. Or, if energy prices explode on the upside like Goldman Sachs told us a couple of years ago (by the way, where's that analyst?), we will have a serious crisis of STAGFLATION. In the meantime, let's just remain oblivious to what's going on. Enjoy the good times and the fact that the Dow Jones (quite conveniently, a price weighted average index not a market cap weighted average index like the SP or the Nasdaq) is almost trading at a new all time high. Let's just hope those good old Wall Street bankers and brokers, those good old Treasury and FED statistics guys and, that good old Republican party, convince people to jump on the train so that the SP and the Nasdaq can catch up with the Dow. Everyone will be happy. We'll be living in a fantasy world. But, nonetheless, we'll feel good.

2006 Sep 30 12:45 PM