Momentum: By Definition it is Hard to Stop
- the quantity of motion of a moving body, measured as a product of its mass and velocity.
- the impetus and driving force gained by the development of a process or course of events.
People trying to manage trend changes are by definition fighting momentum, which feeds on an established trend with powerful force. A premium service I use and otherwise depend upon for analysis of conventional US stocks and sectors (i.e. non-precious metals, non-resources, non-global), [XYZ Premium, name omitted due to wider publication], provided a chart yesterday showing the S&P 500’s breakout to all time highs noting “And to think there are still people calling this a cyclical bull within a long-term secular bear market!”
What [XYZ] forgot to mention is that there was an equal and roughly opposite breakout to fresh lows in 2009, that took the S&P back to 1996 levels. And to think there are still some people calling this a secular bull after an 11-year sideways consolidation of the previous secular bull!
Equal and opposite; that has been a theme lately and we will keep it front and center.
I was somewhat disappointed to see them write that sentence. That is because I pay them a sum of money not to feed me contrary indicators and signs of hubris. But a bigger point is that the surety with which [XYZ] made its trend following statement shows how strong the backdrop is for the regular stock market and against the bear case for one, and the precious metals (firmly an anti-market now) for another.
So here once again is a chart that adds some definition to the picture. Yes the S&P 500 is at all-time highs and this trend should not be fought without ongoing risk management in light of the old saying that “a market can remain irrational for longer than you can remain solvent.” The market makes the rules, not the individual.
The chart shows the 2009 lower low and a nice upside breakout to all time highs today. So what? Here I once again pull out one of my biggest errors, which was the targeting of 888 on the HUI gold miner index based on a similar upside ATH breakout in 2010. I don’t make grand statements of surety like the one quoted from [XYZ] above, but I thought it was a valid target and it was not. Period.
The chart also shows the rising monetary base in lockstep with the current momentum-fueled stock rally. BASE was launched through TARP, ZIRP, QE’s 1, 2 & 3 and ongoing Fed policy. As noted last week, stock market bulls are living in a dream and living large I might add. But it is a creation of policy.
The S&P is plotted along with the personal savings rate of the average US consumer. Savings naturally tend to spike during market liquidations and the plucky consumer dusts himself off and goes all in during bull markets. He is currently at 3.2 down from 8+ during the 2008/2009 liquidation and 8- during the Euro crisis and associated dislocations. It’s a new secular bull market after all!
To make sure we do not cherry pick our information let’s view the S&P 500 as it rises, rightfully, in lockstep with corporate profits. So on a conventional valuation basis, the stock market is simply following its ultimate fundamental data point higher.
A point I have been trying to make all along is that the stock market is fine and the bulls are right. But that is only if you are willing to sleep soundly in the notion that money is going to continue to be manufactured with the express mission of keeping the fundamentals on their upward momentum trajectory (chart 1).
The bulls have it all and there is no reason to fight this momentum when operating by conventional metrics. But there is nothing organic or natural about the bull market unless you consider the manipulation of debt and associated rates of interest to be natural. If so, have at it. Have a ball.
As you know, I have slowly accumulated some ‘regular’ stock positions [ed: against a few long-dated put positions] on buying opportunities over the last few months. But the bull view should always be subject to the macro view because one day policy will not be there to support stocks if bond market supply/demand dynamics overwhelm the Fed’s interest rate manipulation schemes.