Since Tues there have been notable upside moves in long-term rates and bank stocks, with SPX closing at 1403, highest in four years.
A key to whether SPX can rally significantly higher is whether XLF financial ETF, up 6% in 3 days, continues to gain relative strength (charts described at end), adding more momentum investors to their earlier value ones, combining with strong tech and consumer discretionary stocks (AAPL hit an all time high of 600 today, but reversed to close at 585).
L-t rates are finally starting to reflect equities economic confidence in 2012. In a muted reprise of the playbook that worked so well in XLF's very explosive rally off the Mar 09 bull market low, on Tues afternoon bank stress tests and a more positive FOMC view helped further fuel the already very large ytd "risk on" market rally, though not matched by further sharp declines in a very low VIX.
With Greece-Europe tail risk increasingly perceived as off the table from the first 489 billion ECB LTRO on Dec 21, risk markets since then have acted similar to the one-way QE2 bet from Sep 2010 to Feb 2011. Both times, investors believed "heads central bankers win, tails bears lose."
I.e. investors hope for goldilocks growth, not too weak (supporting earnings), not too strong (restrained inflation), but should growth falter, they believe that Bernanke, now joined by the ECB's Draghi, BOJ's Shirakawa (Nikkei up 20% ytd), in Brazil, and other too big to fail central bankers, will step in to support financial markets.
Per my Feb 29 analogy to Nov 2010, SPX had a similar "very small hiccup" last week, then continued its relentless low volatility/volume grind up. As mentioned then, I still believe it is prudent, and now even cheaper, to hedge against the tail risk, e.g. of a war spike in oil price.
As mentioned in recent articles (Mar 12 and Mar 6), with investors no longer obsessing over Greece and Europe, the issue of earnings growth will once again start to become more important as 1Q reports come next month.
Slowing earnings growth, especially excluding AAPL, and possibly peaking margins perhaps remain the last hope for beleaguered bears; market top guessers; underinvested investors, both retail and hedge funds underperforming yet again; and U.S. equity strategists at two top i-banks.
For all of them, two key issues are whether the months-long trend of earnings estimate cuts may have finally bottomed the past week, and what market p/e, with SPX earnings around $100, its price target is dominated by the p/e, currently around 14, which is very dependent on the mood of the market.
Past sharp market declines when VIX was at these low levels were due to renewed concerns about Europe government debt held by its banks, but back then there wasn't a Draghi giving 1 trillion euros in two LTROs to the latter (see my Dec 22 "Draghi as Euro Santa Claus a Big Deal").
Central bankers presumably hope that if they just keep shoveling free money to the TBTF banks, one of these times a self-sustaining stronger economic, in addition to financial, recovery will finally take hold (like repeatedly turning the ignition on an old car before flooding the engine).
Employment and real estate markets in both the U.S. and China this year will be key to whether growth accelerates in the second half.
If that second-half growth acceleration doesn't happen, then presumably the TBTF central bankers club can always just keep printing more free money, because so far there has been no serious organized opposition to them doing so, as permabears never seem to learn.
The first XLF chart is my usual 3-year format, with relative strength to SPY in the top panel. The second chart tries to further highlight whether XLF is making a major change in its relative strength to SPY (dashed line with colored emas on right axis in main chart), juxtaposed to its price (left axis), with top panels showing XLF relative strength to XLK tech and to ACWX global equities ex U.S., it's been a lot more profitable holding U.S. financials than international equities since Sep.LEFT CLICK on charts to enlarge.