Why Are Stocks Rising?

Derivatives

  • China – The Chinese stimulus package was directly aimed at infrastructure and was well over twice as large as ours (relative to GDP). China went on a buying spree of natural resources (they were cheap) and the BDI (see below) exploded higher over 600% in the first 1/2 of the year. China still has a large net surplus and can offer another similar stimulus package without going into debt. India and Brazil have helped, but China is the driver.
  • The USA - The USA was at the epicenter of the financial meltdown. We built phony wealth (phony GDP) by trading Credit Default Swaps and it all exploded when housing prices fell. The consumer, and our government was in significant debt before the financial/economic meltdown. The consumer and banks (especially the larger shadow banks/institutions) have benefited from our stimulus package, bailouts, and printing money by Fed and government.
  • Stocks  Moving Higher – The consumer is saving more and the government borrowing more. Robert Reich has a similar view LINK ( scroll down-thanks to one of you for referencing this) Problem here is we were already in significant government debt and had been running an unregulated financial market that created “Financial Weapons of Mass Destruction.” (Warren Buffett’s term for CDS’s) This unregulated capitalism is GROWING – up 14% from last year. LINK There has been almost no regulation or transparency imposed by government to solve the problem. In fact, we removed mark to market accounting, making less transparency.

So US financials (everyone who traded or still trades CDS’a from AIG to GE) have had (directly or indirectly* ) wheelbarrows of money thrown at them – their profits/stock prices have grown.  China and other emerging markets have maintained a positive GDP and helped move US markets higher. Its great that consumers are saving more. However, we do need consumers (70% of the GDP) to spend to get the US economy moving again.  US stocks can move higher on a falling dollar and selling more abroad.

Bottom LineIt’s the US economy or Main Street that is in deep trouble, not Wall Street.

* AIG was bailed out by US government. They in turned paid obligations to shadow banks & hedge funds, who paid GE Financial and/or big banks, who paid Fannie, Freddie, & smaller banks, who paid mortgage companies etc..  This order is not 100% accurate, but it shows how by paying money to AIG  others “indirectly” got money. Every TARP bailout recipient had its own domino chain of debtors.


STOCKS

AS ALWAYS, DO YOUR OWN RESEARCH BEFORE INVESTING!

Index Percentage % Volume
Dow +1.28% down
NASDQ +1.90% down
S&P500 +1.78% down
Russell2000 +2.38% -

Investors411 record – 4 1/2 years of beating benchmark S&P 500

(see results for last 1/2 year – click  6/25 & scroll down)

  • Brown = repeat statements
  • Green = usually bullish statements
  • Red = Usually bearish statements

Technicals and Fundamentals

Volume exploded lower and stocks exploded higher.  Volume is the #1, confirmation factor of a market rally and in no way did volume confirmed yesterday’s rally. The excuse given by talking heads was it was the a major Jewish holiday. Jews are less than 1% of the US population and they don’t control 50+% of US equities.

Long term – Even more significant is the fact that as this rally gets extended volume has declined. Check out the 4 key US stock indexes (listed above) longer term charts and what you will see is an overall drop in volume as the markets move higher. You’d think it might be due to seasonality – summers are usually slower, but after Labor Day volume historically rises. It has NOT this year.

This does not mean that markets will not move higher, at least temporarily, but it is reason for caution. When the #1 conformation factor of any price move decreases while prices flow in one direction (higher) you have to be skeptical.

A bubble is building. This is why you see me almost begging for a market correction of 5 to 10% sooner rather than later.  You combine this with the fact that the BDI (measurement of world trade) has fallen almost 50% since the summer began and this adds fuel to the fact a price bubble is building. If volume was building you could say new money was coming into the stock market. It’s NOT .

Big news for week is the jobs number fro the month of Sept. coming out Friday.

BDI seems to be temporarily turning higher = Bullish

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Significant forecasting tools/Indexes for stock markets

(Besides #1 Volume & #2 Reaction to News)

BDI The Baltic Dry Index measures the flow of goods by price (world trade) .

2388 is support now resistance level/number to watch two days ago the BDI reversed direction and  BDI was up +20 . Yesterday the BDI gained +9 closing at 2192 . These are very small moves, but in the right direction.

The BDI is almost 50% off its high (early June) Before that it gained almost over 630% from its all time low of 663 in Dec. of 2008 (April 2009 high of 4291 ) A 50% retracement from highs is a major support level. Therefore some stabilization is understandable.

What this means World trade is in trouble – lots of ships are sitting in ports empty.  To some degree, China has stopped buying raw materials and/or the US consumer is not buying as rapidly as earlier in the year. Braking a support level is significant, but 2192 (current level) is still a long way from the Dec. 2008 663 low. = Storm clouds gathering

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$USD - Check out the 6 month chart (to the left) or a multi year chart of the US dollar of the US dollar.

Mantra Dollar up = US stocks down & Dollar down = US stocks up

The dollar rose +0.27% yesterday.  Somethings up that raises caution flags. Both the dollar was up and stocks exploded higher. Usually there has been an inverse relationship.

Last year’s low was around $71, so there is a long way to go before the next major support level.

Positions

The  Positions Section (top of blog) to see all the latest buys and sells

revised to reflect recent trades last weekend

Long Term Outlook = CAUTIOUSLY BULLISH

See Changes in STRATEGY, POSITIONS, & OVERVIEW sections of blog

AS ALWAYS DO YOUR OWN RESEARCH BEFORE INVESTING!

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