The bulls were foaming at the mouth again on Tuesday as the post-Brexit melt up continues on narrow breadth and light volume. This is a squeeze. Nothing more. Nothing less. Still, though, it’s impressive.
In the end, the Dow Jones Industrial Average gained 0.7%, the S&P 500 Index gained 0.7%, the Nasdaq Composite wafted up 0.7% and the Russell 2000 finished the day with a fresh 1.3% gaion. Both the Dow and the S&P 500 notched new closing highs.
Treasury bonds were weaker, the dollar was mixed but extended its rally against the yen, gold lost 1.7% and crude oil rose 4.6%.
The majority of stocks, as measured by the New York Stock Exchange Composite, remain well below their 2015 highs. The “fear trade” continues to outperform for the year to date, with gold, Treasury bonds and utility stocks highlights.
Earnings are crappy, with the second-quarter expected to be the fifth consecutive quarter of declining profits, the first such move since between 2008 and 2009. Consider that only 15% of S&P 500 stocks are making new highs today. And consider that the U.S. stock market is the last man standing, so to speak, as other developed economy markets have already rolled over.
U.S. blue chips are in a bubble of their own; both in terms of risk vs. reward and a lack of fundamental support and in terms of acting insulated from problems bothering overseas bourses.
The catalyst: There are reports that Japan is preparing an even more aggressive round of monetary policy stimulus. Spurred by no less than Mr. Ben Bernanke himself, as the former Federal Reserve Board Chair is in Tokyo consulting with government and Bank of Japan officials.
The long and short of it: Encouraged by an electoral victory, and disappointed by ongoing debt-deflation malaise amid eye-watering public debt-to-GDP levels, Prime Minister Shinzo Abe is likely to unleash a version of Bernanke’s “helicopter money” via a $100 billion fiscal stimulus funded not by debt but by fresh money printing by the BoJ.
For the monetary junkies on Wall Street, excitement over this trumps everything else. The ongoing earnings recession doesn’t matter. Expensive valuations don’t matter. Uneven economic data should be ignored. Look away from fresh weakness in crude oil.
Yet, many are still feeling nervous.
For one, the market is confounding just about everyone. According to Bank of America Merrill Lynch, just 18% of active investment managers are outperforming their benchmark for the worst year on record. Secondly, like the late-2007 highs in the last cycle that came months after Bear Stearns liquidated its two subprime mortgage funds — an early indication that the façade of strength was collapsing — this rally has all the hallmarks of a last gasp surge.
Think I’m full of it?
Just look at the bond market, which the professionals know eclipses the stock market in size, level headedness and importance. About a quarter of global government bonds are trading with negative interest rates. A German railroad today sold the first ever non-government, non-financial corporate bond with a negative yield. Bond-market derived inflation expectations have been collapsing. This is a big vote of no confidence in the virility of the central bank cabal.
A clue that Wall Street is preparing for another downswing — likely on the reappearance of Brexit risks into the headlines with a new British prime minister coming to power later this week — is the way the CBOE Volatility Index (INDEXCBOE:VIX) diverged and is pushed higher.
Finally, for those who still care about fundamentals, big bank earnings are coming later in the week, with JPMorgan Chase & Co. (NYSE:JPM) reporting on Thursday and Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC) on Friday.
Overall, according to FactSet data, S&P 500 Q2 earnings are expected to decline 5.6% from last year.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
