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Tuesday, July 26, 2016

This Emperor's Stock Rally Has No Clothes

Could This Rally Be a Head-Fake?


If there's nothing supporting this rally but euphoric sentiment arising from orchestrated buying, any eruption of reality will reveal the rally as a head-fake.
Let's say you wanted to engineer a stock market rally that triggered every technical "buy" signal and wiped out those who are short the market--what would you do? First, you'd engineer a new all-time high to signal "all clear for further advances."
Then you'd crush volatility as measured by the VIX, signaling that there is nothing standing in the way of more advances.
Next, you'd engineer new highs every day for a week or more.
To do this, you'd unleash a wave of strong buying at every bit of "good news," no matter how jury-rigged, to trigger computer-trading buying: bogus earnings "beats," any M&A activity, rumors of more stimulus in Japan, a pop up in crude oil, etc.--whatever could be construed as even modestly good news.
This entire rally has an engineered feel. All the technical "buy" signals are precisely what you'd expect in a rigged rally.
The rally's strength is reminiscent of the 1999-2000 Internet-era stock market, but compare the fundamental backdrop of then and now. Back then, earnings, sales, profits and employment were all up strongly globally, and China and the emerging markets were experiencing trade-based organic (i.e. not the result of central bank stimulus) expansion.

emperor


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