- The recent new-highs in important stock market indices suggest there is a good probability the bull market in stocks that began in 2009 is alive and well and headed higher.
- Fed Chairman Ben Bernanke's announcement of an indefinite quantitative easing program reduces the odds of a serious recession in the U.S. to no more than 25%.
We realize this bullish stance doesn't seem possible in light of all of the uncertainties in the U.S. and around the world, but we have long observed that the markets have a habit of doing what you least expect. It is only after they have made their moves that the reasons become clearer. Let's take a quick look at the convergent indicators we believe are so important.
Standard & Poors 500 Large Cap Index
The first indicator is the S&P 500 itself. Above is a chart of the S&P Index over the last three years. The first thing that catches your eye is the volatility. Big corrections have occurred in each of the last three years. In each case the sell-off was caused by a combination of worries about the financial crisis in Europe and the political stalemate in the U.S. The chart also vividly shows when the worries diminished, stocks regained their footing and moved to new highs. Additionally, please notice in each case the sell-offs bottomed at sequentially higher levels.
The most significant observation to our bullish case from this chart is the S&P 500's break to a new intermediate high last week. Mom and pop investors didn't push markets to these kinds of new highs. This was a big money job, and big money does not push stocks to new highs just to sucker mom and pop into joining the party. Big money obviously believes the headwinds we have faced over the last few years are diminishing, which will allow for better worldwide economic growth and further stock market gains ahead.
The next indicator is the chart of the S&P Small Cap Index, as shown below. Again we see the three big swoons that stocks made in the spring and summer of 2010, 2011, and 2012. Again we see that the swoons bottomed at sequentially higher levels. Finally, last week the small caps also broke to a new intermediate high joining the big caps.
Standard & Poors 600 Small Cap Index
This convergent break to new intermediate highs by both the large caps and the small caps is important because it means that the recent breakout of stocks was very broad. Breadth is a key element in all healthy bull markets. The S&P Small Cap breakout also has important implications for the U.S. economy. It is very unlikely that investors could have pushed the index to a new high if big investors had lost hope in the U.S. economy. Indeed, small cap stocks are known to do more of their business domestically, and they are much more tied to U.S. banks for financing. Thus to continue our search for a definitive convergence among the important elements of the stock market, we now turn to the regional banks. We are not looking at the major international banks like Goldman Sachs (GS) and JP Morgan (JPM), we want to look at the big regional banks like BB&T (BBT), PNC Financial (PNC), etc. that primarily do business in the U.S.
Regional Bank Index
The chart shown is the exchange-trade fund of the major U.S. regional banks (IAT). A quick look at the chart does not reveal the same symmetrical rises and falls of the S&P large and small caps. Additionally, its recent action has not pushed it to a new three-year high, as have the charts of S&P big and small caps. Importantly, however, the Regional Bank Index did push to a new "two-year" high last week, joining the other major indices. Taken as a whole, we believe there is a high probability that the regional banks will take out their April 2010 high in the weeks and months ahead and lead both the big caps and small caps higher. Big regional bank loans are growing, loan losses have dramatically fallen, dividends are being hiked at a fast pace, and earnings are again growing.
Bernanke's Quantitative Easing announcement was not a surprise to the markets. It was predicted by almost every major investment house. What was surprising was its lack of a termination date, like most other monetary actions the Fed has initiated in recent years. QE3 then becomes QE infinity and at its bottom line restates what we believe the Fed has been saying all along: "We will do whatever it takes to keep the economy out of the jaws of recession or even depression."
The latest Quantitative Easing has caused a cacophony of comments from many different philosophical points of view. It has been praised and reviled. The revilers believe it will usher in runaway inflation; the praisers believe it will put the housing market on a sustainable growth track, something our economy so sorely needs.
We believe QE-infinity will be more positive than negative, and we believe the recent convergent break to new highs by important stock market indices says that big investors agree with us. We'll have more to say about the issue in coming updates.
Disclosure: I am long IAT. 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.