Wall Street, We Have A Problem!

| About: SPDR S&P (SPY)

Pardon me, astronaut John L. Swigert, Jr., for my modification of your alert to Houston on Apollo XIII's tricky return to Mother Earth in April 1970. That was an incredibly dangerous time for this epic space mission, which, fortunately, ended safely.

Of course, according to the financial media, there's always a life-threatening market problem brewing at the corner of Broad and Wall. If you followed these minions, especially since the bottom in 2009 (660 on the S&P 500), even more so their advice, it could have cost you a lot of money. Let me name a few a few of these potential financial disasters that did not play out: we had a slow climb off the bottom in the US with the potential that we could have fallen back into recession at any moment, prolonged economic weakness in Europe (due to eurozone austerity), Cyprus, government shutdowns (threatened and real), the Sequester, China imploding, Greece again, Quantitative Easing (QE), the taper of QE, the end of QE, the first increase in the Fed Funds rate (last December), Brexit and the election of Donald J. Trump. I'm sure I missed a few.

After a seven-year barrage of this (the stuff nightmares are made of), we are still standing. The S&P 500 closed at 2181.91 (more than a triple off the low) on Friday, November 18, 2016, just points away from making another new all-time high this month. In fact, all the major market indices have broken to new all-time highs in recent weeks.

And yet, there is still "no joy in Mudville."

Let me elaborate with a few choice examples from last week's financial media pronouncements:

From Bob Pisani at CNBC - Markets float near new highs, but retail investors may not want to get too excited (11/17/2016). I guess it is OK for the pros to wade in. The main thing that got Pisani's attention was a report of investor sentiment emanating from the American Association of Individual Investors (AAII). The report showed a spike in individual investor bullish sentiment to the highest level of the year (46.7%). Pisani implied that this was a bad sign because the "the little guy" is always wrong. What he fails to mention is that this number has been running below average (39%) for a prolonged period, and that the sample was taken from an engaged segment of individual investors, not those who have sworn off stocks (the people who usually come in when it's game over). For added information, check out this piece from Forbes (5/31/16). Pisani's piece is the negative case and is typical of CNBC's output since the lows of 2009. Be warned that the end is near, if they ever become constructive on the market!

And then there is Joe LaVorna, Deutche Bank chief economist (who's been on the wrong side of the market for some time) who warns the "US economy will improve and the Fed could find itself in tough spot,..." Inflation out of control - good news is bad news.

Finally, How could we forget perennial naysayer, Barron's Randall Forsyth and his column this week: "Has the Trump Rally Gone Too Far?" (you need a Wall Street Journal subscription to view).

Lest we forget, what about interest rates?

I believe the next Fed funds rate increase is baked in the cake. The bond market has already priced it in.

The yield on the 10-year US treasury has jumped in the past week from a low of 1.87% to a recent high of 2.35% (almost 1/2 of one percent-26% in ten days). I'd say the increase in November already fully discounts another quarter point bump in the Fed Funds in December. I mean, the yield on the 10-year is up almost one full percentage point since the "Brexit." What is really amazing, contrary to popular belief, is this has happened as the market continues to plow ahead to new all-time highs! We have made the point that this could happen many times, including in my post of October 10: "Rising Rates - A Knockout Blow?"

Finally, it appears we have a breakout!

"A breakout is a price movement of a security (or market) through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility." For the past year most of the popular indices have been locked in a trading range. This appears to have come to an end after the election. There is no guarantee that this breakout will hold. However, that it comes at a time of less-than-stellar sentiment and disbelief in its sustainability gives credence to the idea that it could be for real. A significant leg further up in the markets could be in the offing. A review of a past post, "This Market, I Don't Get It," might be useful.

As of this post, it appears that many market participants believe that the business-friendly economic proposals of the new administration are a fait accompli. This speculation may continue until the rubber meets the road after the inauguration and the reality of working with Congress sets in. In the meantime, the economic news remains constructive - better-than-expected 3Q earnings, jobless claims the lowest since 1973, good housing starts, improving retail sales and sub 5% unemployment. All of this would appear supportive of the market. These positives should not change even if certain parts of the Trump economic agenda runs into resistance. Though punctuated by corrections that could come at any time, I believe this secular bull market has further to run.

What is your take?

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