Equities enjoyed one of their best performances of all time last week on signs of renewed economic vigor and progress by European leaders to quell the latest round of the Greek debt crisis. The "re-recovery" I've been writing about in my columns and blogs posts has arrived, and investors are crawling over themselves to participate after stocks fell to their most oversold levels since the late 1990s by some measures.
It was only the 10th time in the history of the S&P 500 since 1928 that it gained at least 0.75% for five straight days. History also suggests Tuesday's slight weakness was to be expected: Seven of the other nine examples dipped the next day. But in eight of those nine examples, buying the dip resulted in gains two weeks later.
I think a similar performance is in store for us now, thanks to cautious sentiment, impressive market breadth and strengthening economic fundamentals. But above all, the Federal Reserve's "stealth stimulus" -- a subject I've touched on frequently -- will keep funneling easy money into risky assets like stocks as the same dynamic that powered the housing bubble is at work again.
This may come as a surprise to people, since the Fed's $600 billion money-printing operation just came to an end after eight months. The biggest achievement of the program is that it killed the risk of deflation and injected some inflationary pressure into the system -- enough to unleash the "stealth stimulus" of negative real interest rates. Not only did this avoid a Japanese-style deflationary nightmare, but it maximized the stimulative effects of monetary easing already in the system.
It's like this: Although QE2 is ending, the Fed is all in. Pedal to the metal. In inflation-adjusted terms, interest rates haven't been this low on a sustained basis since the mid-1970s. The chart above shows how consumer price inflation (red line) is accelerating while the Fed holds short-term interest rates steady (blue line).
Notice that when the red line was above the blue line back in 2003 and 2004, the ultra-easy monetary conditions helped fuel the housing bubble. The same dynamic is at work now -- only this time it's much stronger.
No wonder Wall Street pros are scrambling back into stocks. Just looking at price, the downtrend that started on May 1 is officially dead as the NYSE Composite breaches overhead resistance and its ADX DI+ (green line) returns to levels not seen since February -- moving solidly back into uptrend territory (35+).
Breadth is also much improved as buyers buy up a wide swatch of the market. This is a fantastic sign of confidence in the uptrend. The chart above illustrates this by looking at the ratio of NYSE up volume to total volume. Friday's session was the first 90% update since Dec. 1, ending a long pattern of 90% downside days between April and June that accompanied the heavy selling seen during the period.
How should investors play along? For weeks I've been recommending my newsletter subscribers and MSN Money readers get aggressive with exposure to smaller, riskier stocks as well as out-of-consensus bank issues like Cathay Bancorp (CATY).
Now it looks like energy stocks are perking up again, with Sandridge Energy (SD) looking very attractive -- so much so that I've recommended it to my newsletter subscribers and am adding it to my MSN Money sample portfolio. I found Sandridge Energy with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.)
To help keep me accountable to readers, I've added a selection of picks from my newsletter service and MSN Money recommendations to an online sample portfolio that you can see here. I will update the portfolio regularly in my columns and blogs to keep readers abreast of my current recommendations.
Disclosure: Anthony has recommended SD and CATY to his newsletter subscribers.
Check out his new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. Feel free to comment below.
I can’t include any graphics here but I'd like to do a quick calculation for Anthony’s readers. The size of the unfunded liabilities for the US in the next 40 years is approximately 100 Trillion dollars. That’s 10 raised to the 14th power.
For simplicity, we can round up the US tax base to 100 million people. That’s 10 raised to the 8th power.
So, roughly speaking, each taxpayer is on the hook for 14-8 = 6, 10 raised to the 6th power or 1 million dollars.
Who has a million dollars to pay for his share of these liabilities? Well, definitely not Congressmen and government employees. They have their private retirement pool, independent of the depleted social security we will get to enjoy. They may be lazy and stupid but they sure know the difference between a sweet deal and a rotten one. Even my dog can tell the difference!
People who have a massive financial burden on their shoulders tend not to consume much. Europeans aren’t in a much better position. The Chinese have a mountain of problems of their own. So let me ask you this: who is going to be buying the stuff that makes companies profitable? Retired Congressmen? Retired Wall Street executives living comfortably in Barbados? If anyone knows, it would be great if you could share it with us.
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