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3 Problems With Dow 16,000

The new Dow Jones high warrants some healthy skepticism

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More Cheap Money?

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Investors only seem to care about one thing and one thing only: The ongoing flow of cheap money stimulus from the major central banks.

You can see this in the data. Since the bear market ended in early 2009 — when QE1 was launched and Ben Bernanke started subsidizing government borrowing — the relationship between the S&P 500 and the Fed’s monetary base is an incredible 87%.

That is, changes in the Fed’s money supply explain 87% of the changes in the stock market. In the four years leading up to this, the relationship was just 36%.

The trouble is, the latest Federal Reserve meeting minutes point to a tapering of the ongoing $85 billion-a-month QE3 program “in coming months,” with officials weighing tapering before the economic outlook improves.

The risk is that the Fed is losing control of the bond market as 10-year Treasury yields push back toward 3% — the level that spooked the markets in May and caused the Fed to table the taper discussion. High-yield corporate bonds also are under pressure, suggesting the credit markets are less than ebullient right now.

What Now?

I continue to recommend investors view the Dow 16,000 milestone with a healthy level of skepticism. This feels a lot like the setup heading into the Dow Jones’ charge on the 15,500 level back in May.

Sure, it was a less meaningful, non-round-number threshold. But the context in terms of sentiment, breadth, and bond market conditions suggests downside risks are growing.

As of this writing, Anthony Mirhaydari did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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