Wed Nov 23, 2016
Dennis Elam
Wed Nov 23, 2016
Word Count 694
Bull Market Optimism Surges Stock Prices
The Dow Industrial Average topped 19,000 for the first time ever and small caps locked n the longest rally in 20 years as investors poured into riskier assets on speculation growth will accelerate.
Blooomberg News, Nov 22, 2016
The business news is alive with optimism buoyed by positive social mod. President Elect Trump’s popularity is up ten points since the election. An analyst in Germany, no less, predicts the S & P will be up 9.2% by the end of 2017. (I always wonder where these guys get the .2%?)
I don’t want to rain on the parade but will observe that such optimism occurs at market tops like those of January 1973 when Nixon was re-elected, March, 2000 at the top of the dot.com mania, and November , 2007 when Wall Street was getting rich leveraging sub-prime mortgages. The top of the Dow Jones Transportation Average occurred in November 2014. This is within a few days of an exact forty years from the los of December, 1974 when the Industrials sagged to, not a misprint, a mere 577. This is a caution to observe the power of long term cycles, no matter what the current social mood seems to be.
Actually now that I think about it, Nixon was not terribly popular among Republicans. He was certainly no conservative having lifted the gold standard and imposed wage and price controls. Likewise, Trump is a political elusive seeing the world in terms of winners and losers rather than left right ideology. It is impossible to guess what might go right or wrong. But a fellow who has already threatened a fight with both China and Mexico over trade has plenty of room for error. If the market begins to sag, watch the Transports, between now and Christmas, my concern will be justified, if not, perhaps the German is correct.
There are a few things we do know with reliable certainty.
- Long term bond prices have fallen about 14% since their top last July
- Thirty-year interest rates have risen from 2.1% to 3% which is a stunning 42% increase. I suspect the low in interest rates dating from the 1982 high is in. By the way that is a near perfect 34 Fibonacci years for those that follow the Italian mathematician.
- The Dow Utility Index tracked the bonds by also falling 14% since June.
- The Amex Real Estate Investment Trust Index also fell 16% in the same period. We can safely conclude that interest sensitive markets are seeing much higher rates ahead.
- Bank stocks have soared, sensing higher lending rates.
- Gold bottomed last December soaring from 1,050 to 1,375. It has now re-traced about half that rise to trade at 1,200. I suspect gold and mining shares are a buy here.
- Amid reports of massive over supply, West Texas Intermediate crude rallied from $28 to $52 from February to June. It has traded sideways since. I suspect a final low in January.
- Natural gas made its low in March at $1.80, nearly doubling to $3.40 by October. Now it is on a tear again after finding support at $2.60. No doubt this might be traced to the Trump victory and more support for US produced carbon fuels.
- After being given up for dead, stocks like Cliffs Natural Resources CLF have soared from near nothing to $8.50.
- The Bottom Line
- It appears that multi-year lows in commodity prices occurred in 2016.
- This has been accompanied by eye-popping reversals in interest rates with much higher yields. This portends a complete collapse in recent bonds sold for no to negative interest rates.
- Natural gas has resumed a bull market while crude remains on hold for a couple of months.
- The Dollar has soared while the British Pound and Euro have sagged. Once again, the Dollar is the safe haven.
- Stock prices have soared to new highs. Will investors continue to buy stocks as bond yields offer higher and higher returns?
- For that answer we suggest you continue to read this column and our accompanying weblog, the market perspective in 2017.
All my best to our readers over the Holidays and into what should be a most interesting 2017.
Follow Dennis at http://themarketperspective.com
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