What a Difference a Week Makes in the...
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Jonathan Yates
What a Difference a Week Makes in the Life of a Bull Market!

With the stock markets down about 4% from recent peaks, investors naturally applauded today’s gain of more than 80 points for the Dow Jones Industrial Average.  Also comforting was how it finished with such a bullish kick, with the candlestick patterns forming an elongated, positive formation.  In addition, bullish sentiment is at 64%, about 2 to 1 over a bearish outlook, another pleasing sign.

The chart below shows a very strong finish today for the Dow Jones Industrial Average.

But the chart below here, reveals how the exchange traded funds for the Dow Jones Industrial Average (NYSE: DIA) and the Standard & Poor’s 500 Index (NYSE: SPY) have fallen in recent market action after strong rallies.

There are unmistakable bearish indicators clawing the bull stampede.  As Jim Cramer said about it, “Its just not a pretty picture.”  Rising interest rates have helped to paint this ugly portrait.

It appears as if there will be some modification to Quantitative Easing III, the Federal Reserve program of financing the US budget deficit with $85 billion a month in Treasury Bond and mortgage-backed securities buying, soon.  Demand for Treasuries has been strong in recent auctions.  Rising interest rates will make the demand even more robust.  That will allow for the Federal Reserve to truncate buying.

The market might just be looking for a reason to pull back, too.  Earnings season, will based more on reductions in spending rather than increased revenues, was not terrible.  But it was certainly not something to just a 22% stock rally since last November, when the elections and the budget deal calmed the markets.

With such a surge, Wall Street will take any reason to pull back.  Rising interest rates are certainly more than enough.  Higher yields from bonds are very enticing to investors looking to lock in gains with so much economic turmoil around the world.  Remember too that much of the rally in equity bourses around the world has been based on weakness, not strength.

Whenever a global central banker, particularly from the Federal Reserve, announces more quantitative easing in the form of bond buying, the stock markets surge.  That is a bearish sign as it manifests that economies have not recovered enough from The Great Recession to produce enough tax revenue finance the operations of their government.  It also shows that the debt of that government has little appeal in the marketplace, so the central bank has to acquire it through expansion of its balance sheet.  It is certainly not bullish for fiat currencies in that trillions more in paper assets are beign created without any corresponding economic growth.

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