As was anticipated in last night's commentary, the market flushed out the weak longs, stopping short of the weekly pivot @1320, as the low 1320's were aggressively bought and finished off with an immediate bull reversal. There have now been 5 days where the market traded above 1330 and failed, leaving us with the burning question, "Are we stalling at the highs, or refusing to pullback even enough to fill last Wednesday's gap up opening (before moving higher)?
As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.
While QE2 may end in June, the Fed’s near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.
As short interest has dropped off significantly and today's flash break was far too quick to trap any new shorts, it does not look like there will be any kind of short squeeze taking place. Therefore, we must still remain vigilant of another shakeout that would fill the previously mentioned gap and perhaps test the 20EMA@ 1315.00, (with the last line of defense still @1300.00 at the confluence of monthly PP and 50EMA). The dollar still looks poised to test 75.00 while today's quake in Japan will put more pressure on the yen, both of which are short term bullish U.S equities and supports the view for new material highs.
While QE2 may end in June, the Fed’s near zero interest rate policy(ZIRP) may continue ad infinitum, or at least until inflation is actually the result of income growth and economic growth instead of monetary policy. Once again, Keynesian money printing/credit creation has been substituted for actual wealth creation. And once again, it has led led to massive debt across private and public sectors, as nominal income not only remains flat, but in real terms is contracting at a 2.3% annual rate. True, corporate profits are up and are close to all-time highs as a percentage of GDP, but this does not necessarily reflect a robust economic recovery as evidenced by the still depressed housing market. Strong control over the balance sheet and cheap labor costs due to wage concessions and layoffs, has resulted in lower unit labor costs and higher productivity. However, while there has been an extraordinary recovery in corporate profits, top line growth has not been spectacular, and bottom line growth has not led to job creation.When QE2 ends, the business cycle should return to normal, and just like the market does so often, profits should revert back to their mean, leaving nowhere for valuations to go, but down. The burning question now is, " Is that going to happen tomorrow, April 27th, the end of June, in 6 months , or a year from now.
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