Wednesday, March 14, 2012


Here is a weekly bar chart of the cash S&P 500. Over the past few days this average has moved above its 2011 high and joined the Dow and the Nasdaq at new highs for the move up from the 2009 low point.

I think this is a genuine breakout which is likely to be followed by a move in the S&P back to its 2007 high points.Here are my reasons for optimism.

First, I see no divergences among the stocks and sectors which have been leading the averages upward from their October 2011 low points. In particular, banks and home builders are showing persistent strength as is the tech sector led by Apple (AAPL), this bull market's leading stock. Until such divergences begin to appear this advance will remain on solid ground.

Second, the British, French, and German stock markets are all strong and making new highs for the move up from their September 2011 low points. They have not yet moved above their 2011 highs. But weakness in the euro currency against the dollar shows that the European central bank is providing plenty of liquidity. As long as the euro continues its drop against the dollar (I think it is headed below 1.2600) the north European bull market should continue. This in turn means that an EU banking crisis is no longer a danger, a possibility that weighed heavily on stock markets world wide last year.

Third, the Japanese central bank has committed itself to a positive inflation target and is doing its best to devalue the yen against the dollar. I think they will be successful and expect the see the dollar/yen at or above 90.00 in the coming months. This provision of yen liquidity will have positive economic repercussions for the world economy.

Finally, the Fed appears to be committed to keeping the Federal funds rate low for the next couple of years. I think this is an admission of failure and a manifestation of its unwillingness to aggressively encourage higher nominal GDP growth in the US. However, if the Fed is serious about maintaining this target higher-than-expected growth in the US economy will have the effect of producing "back door" quantitative easing. This will occur because the Fed's announced target rate will be too low relative to the higher levels of US growth I see coming and consequently the Fed will have to provide more and more liquidity to keep the funds rate where it is now.

Looking at the chart above you can see two sets of rectangles. The pair of blue rectangles shows that the S&P would rally to 1440 if the move up from the October 2011 low matches the size of the July 2010 to May 2011 rally. If the move up from the October 2011 low matches the size of the March 2009 to April 201 rally (red rectangles) it will end with the S&P a little above 1600. The 1600 target is a bit above the 2007 top at 1576 and stands at the upper green trend line I have drawn. The green oval delineates my current target for this bull market.

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