BarroMetrics Views: S&Ps Mini Bubble
Figures 1 and 2 say it all.
Figure 1 is the S&P cash, Normalised Volume. Notice that since Jan 3, we have seen the volume and/or range decline as the market has moved higher. On the other hand, the 30-years have declined in price (up in yields) as the S&P has moved north.
Now generally under these conditions, one could reasonably expect the S&P to move down. I have seen forecasts of 1% to 5%; but all the S&P wants to do is grind up. What do I mean by ‘grind up’? Let me quote Sentiment Trader:
“Bulls enjoyed their third straight day of new highs with volume not only well below average, but each day lower than the previous day. That’s usually a bearish setup going forward, but that’s in “normal” market conditions, which we most definitely are not experiencing now”.
My view is the S&P is in a mini bubble; the players sustained in the belief that the FED will do whatever is necessary to prevent any substantial decline. Of course, in the long run, the FED has no such power but under these conditions the S&P can continue to move up far longer than shorts can remain solvent.
As in all bubbles, we are starting to hear the cry: “This time is different. The stock market will continue its rally”. I have heard this many times before, most recently in Oct 2007 (just before the sub-prime induced crash).
In the meantime. commodities and interest rates are all saying that inflation can be expected and in these instruments we see the ‘normal’ rules of trading apply. That being the case, that’s where I’ll park my trading dollars, at least for now.
FIGURE 1 S&P
FIGURE 2 30-Year Bonds and S&P, Cash