“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute” – William Feather
It’s been a while since the stock market rallied following President Trump’s election. More precisely, almost three years have gone, and suddenly everyone screams recession. Sell stocks. We’re going down.
Hold your horses for a moment. The market is strange. I’ll give you that. But it also is very smart.
It's impressive how well the S&P 500 (SPY) has held up given that the 10Y-2Y Treasury spread has dropped 30 basis points and gone negative in just over a month. I’ve noted the disconnect for some time now in the Lead-Lag Report.
Why would that happen when common sense and basic economic principles scream at stocks to be lower? Industry expert warnings appear daily in financial media. Here are three things that favor still holding stocks.
First, the negative yield debt pile. It passed $16 trillion (yes, with a “t”) for the first time ever on fears that the global slowdown may lead to a recession.
But this raises a serious question for investors ever-searching for positive yield. And there are many still. Where do I park money? Higher yield comes with higher risk, so it explains the reluctance for stocks to come down.
Second, there has never been a rise in price without demand exceeding supply. When buying volume exceeds selling, stocks rise. It’s pure math. As it turns out, today’s corporate profits go mainly to dividends and buybacks, keeping a floor below any market dip.
Only REITs (IYR) beat the year-to-date performance of Large Caps. Smart money has clearly gone here.
The third point I want to make relates to the technical picture. Everyone frets about recent declines, but the market still eyes new highs. After all, the very definition of a bullish trend tells us that if the market continues to form a series of higher highs and higher lows, the bullish trend continues.
For technical bears to be heard, the 2,750 level must go. It invalidates the higher lows series.
With Lumber turning the corner, and massively overbought Treasuries vulnerable, the bull market may yet live on. The reflation thesis remains intact – just delayed by a few months.
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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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.