3 reasons the stock market looks bulletproof
Stocks have looked unstoppable lately, with the S&P 500 up nearly 14 percent from its Oct. 15 lows and recently enjoying a 29-day streak above its five-day moving average -- a record run of consistency.
And this comes at the tail end of what has been a steady market rise since late 2012, with the S&P 500 recently completing its 29th consecutive month above its five-month moving average. Moreover, it hasn't suffered a major decline below its 50-week moving average -- a measure of trend strength -- since the summer of 2011.
Said another way, it's been more than three years since the health of this five-year-old bull market has been really questioned.
Although there are innumerable reasons behind the waxing and waning of financial markets, three big catalysts stand out as supporting this unprecedented rise.
The first and most important (since it's enabling the other two) has been the steady support of cheap money from major foreign central banks.
The Bank of Japan unleashed another tsunami of monetary policy stimulus back in early November in response to economic weakness there as consumers recoil from a recent sales tax hike. Not only is the BoJ buying government bonds, but stocks as well. The People's Bank of China recently cut its policy rate for the first time in two years.
And lately, the focus has been on the growing expectation that the European Central Bank, despite resistance from German officials and possible legal hurdles, will soon engage in a government bond-buying program to counter weak economic fundamentals and falling inflation expectations. Just the hint that this action is forthcoming from ECB policymakers has been enough to bolster financial markets, helping push down eurozone government bond yields to record lows.
Second, these actions stand in contrast to the improvement underway in the U.S. economy, with job gains accumulating at the best pace since the dot-com boom. That, in turn, led the Federal Reserve to end its bond-buying program back in October. All eyes are on Friday's payroll report for additional confirmation that the job market here at home is tightening, paving the way for a long-awaited rise in wages.
And third, the differences in monetary policy stances (and economic outlooks) has sent the U.S. dollar soaring against the euro and the yen, and in turn, helped crush commodity prices including crude oil. Last week's "no cut" decision from OPEC deepened crude oil's decline, raising hopes that cheaper gasoline prices will further bolster the U.S. economy.
Market insiders have used these currency trends to place directional bets that then help fund their trades in stocks and bonds. These are known as "carry trades" and explain why the S&P 500, for instance, has such a close inverse relationship with the Japanese yen as shown above. When the yen falls, stocks tend to rise. Often, the relationship is so tight that stocks will follow the yen's oscillations on a tick-for-tick basis, as shown in the charts above.
All of this is self-reinforcing at the moment and would be undone only by a major shift in currency trends.
Sparking such a shift could be a nasty fiscal budget fight in Washington as Democrats and Republicans prepare to lock horns over President Obama's executive action on immigration. Or maybe the ECB's promises of a big bond-buying program will be delayed due to growing dissent, particularly from Germany. Or maybe crude oil can find a reason to rebound.
But for now, the rally looks untouchable despite the scary warning signs for stocks I mentioned in my last article as we head deeper into December -- a month that, historically, has been good for stocks.
