Archive for the ‘Investor Sentiment’ Category

Stock Market Continues to Set Records, But Why?

Monday, June 1st, 2015

Let’s take a simple quiz and answer the following multiple choice question.

The stock market is hitting new highs because:

  1. Corporate earnings are at an all-time high.
  2. The economy is recovering.
  3. The market is being manipulated by the Federal Reserve Board.
  4. Investors lack common sense.

Corporate earnings are supposed to drive stock prices.  That used to be true, before the market was made dysfunctional by Fed mingling, high-frequency trading, overbearing regulations and other factors.  It’s not true anymore.  At least not now. S&P 500

The stock market has been setting records, even though S&P company earnings declined 13% in the first quarter of 2015.  That follows a 14% declined in the fourth quarter of 2014.  Do you see a trend here?

As our friend Charlie Bilello of Pension Partners, LLC pointed out on Contra Corner, six out of the ten major S&P 500 sectors showed year-over-year declines, including consumer sectors, which were supposed to have benefited most from a decline in gas prices.

(more…)

Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

(more…)

Mario the Magnificent

Friday, June 6th, 2014

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Mario Draghi

Mario Draghi

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

(more…)

Bully for 2013 … But What About 2014?

Friday, January 3rd, 2014

2013 markets were full of bull.

The economy continued to sputter along, growing at about 2%, unemployment remained high and corporate profits were mediocre.  Yet the S&P 500 index rose a staggering 29.6%, its best performance since the go-go-days of 1997.

So what sort of bull drove this bull market?  The Federal Reserve Board’s quantitative easing (QE) program, high-frequency trading and exuberant investors who shifted into stocks with renewed confidence.

Investors Intelligence SurveyWhen Fed Chair Ben Bernanke hinted in May and June that The Fed might start pulling back on its bond buying soon, the market initially fell and interest rates rose.  But ironically, rising rates drove investors out of bonds and many invested further in stocks, pushing the market even higher.

More Bull in 2014?

As 2014 begins, the bullish sentiment continues.  More than 60% of those surveyed by Investors Intelligence are now bullish and the bull-bear ratio is at a record level of more than four.

Bullish sentiment at this level is typically a good thing, though, as high investor enthusiasm typically leads to a drop in the market.  When investors are at their most bullish, that’s when the stock market usually drops.

(more…)