Zero Rate Stock Moves

Markets continue to show signs of being extremely overdone on the upside with technicals currently deteriorating faster than the DJIA may be able to retrace to 10,000. The Trail of Rally post of May 11, which predicted the summer rally, complemented the bottom call made in the Giant Bear Miscalculation post on Feb 20th this year. Those market conditions are a part a structure of price configurations which move like tectonic plates under trends of various dimensions and also beneath the business news noise so inaccurately labeling various items as responsible for daily price action.

Current rally conditions have perplexed the Bears with relentless late session rallies coming after solid interday breaks. As in most moves, these rallies are a result of a combination of factors but primarily a bearish complacency and a reliance on already well known macro information. The Bears had a feast but those days are gone and the Bulls have the tactical advantage of surprise now.

The most notable stock market rally from a zero interest rate base was in Japan in the nineties. Recently a Bloomberg article published a chart showing the similar contours between current market patterns and Japan's rally. Of course the comparison ask you to believe the similarities will continue and extrapolates a 40% gain in the SP500 during the remaining balance of this year. The downside however is that if you simply follow the chart, one sees an ultimate death dive in prices and a bearish rolling line into the present.

Stock rallies in zero rate environments which measure the underlying economic conditions based on the performance of stocks is a big mistake. Stocks will almost always be the initial primary beneficiary of an investment landscape which leaves few alternatives. The ultimate roll over of rallies such as these is due to the fact that all the things that did not work before the big break, still do not work very well at the recovery break. That would include autos, retail, construction, and banking.

Coming Week Will Be The Battle For Bull/Bear Title

Markets reversed the early break on the week and rallied to make new highs for the move since the March lows. Bears have had to take their lumps as market technicals have pushed into over bought configurations not seen since October of 2007. But there is no place to hide if you are short as anyone knows who bullishly road the break and eventually the oversold idiocy of late winter 2009. Now the idiots are long and some are arriving late to this rally. What might have been a healthy test of correction lows for next week, had this weeks correction continued, now looks as if it will be the an area where the bulls attain price levels which will create the Bull/Bear lines for all price action remaining this year.

Market Bruises

Problems creeping into the Spring/Summer rally as various supporting elements begin to bruise. China's stock market is cracking which brings problems for so many equity growth supporters who have had little proof from the rest of the world's economic data that anything but a slow choppy march was ahead for most investments. Yes, when the market doll was run over and the stuffing was left to be collected and reassembled by cable business news anchors and guests, a valiant effort to manufacture bull dolls began because they make better companions for the thoughtless.

Markets will plow into some correction depths as next week's lows will become the dividing line for September/October price action anxiety.

Real Opportunity Search Begins

Money funds yielding nothing is being written about these days as there seems to be some surprise to the notion of stubborn low yields despite the rise in stocks since March. It should not be a shock that most of the profits from yields are being spent on expenses by the fund managers since little profit margin is left after the returns in Treasuries, the generating instrument of the money fund investments. Further, despite the draw down in money funds over the last couple months, there is still about 500 billion more in balances than there was in 2008.

Low yields and a 'creeping out of the storm cellar' have contributed to the rally in stocks as re-investing occurs. This along with substantial foreign purchases has put a bid in the markets. However, there is clearly a reluctance to chase perceived price discount value opportunities aggressively, leaving continued large balances in money funds. Ultimately this will limit upside momentum but does not eliminate the creeping bid side necessarily.

Though money funds are just a part of the investment environment, they do reveal the problems for the bulls. How does the market move substantially higher in a dramatically altered world on attitudes of acceptable risk? One where a primary sector for leverage, real estate, has been substantially reduced and may not return as a contributor for years. What is the substitute? Job growth? No. New risk opportunities based on cheap stocks? Not likely once the major indexes claim a 50% retracement from the March 09 / Oct O7 range,(which the Nasdaq100 futures completed today). No, the low fruit has been picked since March and now the real search for opportunity will begin.

Few Reliable Measures

This one hundred plus day rally for the index markets has seen the DJIA rally over 43%, with the SP500 and NQ100 exceeding over 50% gains. The particular migration back to 10,000 DJIA will continue with enough downside bend and turn activity scary enough to make many stop looking up. But this current rally is one of investors and traders returning to purchases based in part on perceptions of bargain values, short term opportunity, and finally, top quality risk investments. The first two seem to fit the stock indexes, while the latter is a bit tough on the return side since few AAA short term investments exist that do not return near zero.

Finding bargain values in stocks is a game filled with few real reliable measures. Those actually getting paid to analyze stocks are constantly fooled by gamed data, while the upside bias of business news coverage remains a function for the simplest of minds. Buying large percentage breaks in price does work, but it usually remains a short term play. The determination of real value will have to be played out in the balance of this trading year as to whether low prices are really value opportunities. I suspect many will be disappointed and will discover that value is the price you sell at below your purchase price.