Technically Speaking: Bull Market Or Bull Trap?

For the fourth time, since the end of 2017 the market has set an all-time high. Each previous all-time high has led an almost immediate sell-off. 

Will this time be different?

Such is the belief currently which is being driven primarily by the “Pavlovian” response of a more “accommodative” Federal Reserve which is expected to cut rates sharply by the end of this year. It is also the “hope” there will be a resolution to the ongoing “trade war” with China at the G-20 Summit next week. 

Nowhere was this “Pavlovian” response more evident than in Jeffry Bartash’s latest post for MarketWatch:

A stream of negative news pointing to a slower economy has not only failed to halt the latest bull run on Wall Street, it’s actually encouraged investors to snap up more stocks.

In the sometimes wacky world of Wall Street, the reason is understandable enough. Investors expect weaker U.S. growth to force the Federal Reserve to cut interest rates and supply more stimulus to the economy. Lower rates also make stocks more attractive investments.”

After a decade of near zero interest rates, $33 Trillion in liquidity, and a seemingly unstoppable “bull market run,” which was caused by zero-rates and an endless stream of liquidity, it is not surprising investors expect the same outcome – forever.

However, assumptions are always a dangerous thing. Markets have a nasty habit of doing exactly the opposite of what the masses expect. 

As I noted this past weekend:

“The critical point here is that QE and rate reductions have the MOST effect when the economy, markets, and investors have been “blown out,” deviations from the “norm” are negatively extended, confidence is hugely negative.

In other words, there is nowhere to go but up. Today, it is entirely reversed.

The extremely negative environment that existed in 2009, particularly in the asset markets, provided a fertile starting point for monetary interventions. Today, as shown in the table above, the economic and fundamental backdrop could not be more different.

Lowering interest rates and quantitative easing are ‘incentives.’ Incentives work when there is pent-up demand for a product, but are much less effective when everyone always has what you’re offering.  

There is little “pent-up” demand for assets currently, which increases the risk of disappointment.

Nonetheless, the “hope” of lower interest rates, and more liquidity, certainly provided the support needed in June for the “sellable rally” we discussed at the end of May.

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