Why are Stocks Rallying?

The bounce off the Feb 11 lows has puzzled many investors.  But, it’s not all that complicated.

As more and more traditional investors and traders abandon investing, markets are increasingly driven by complex algorithms.  The most powerful is the yen carry trade [what’s this?], as seen in moves by the USDJPY.  The S&P 500 futures (ES) are shown for comparison purposes.2016-03-11 USDJPY v ES 0601A close second is an algorithm driven by oil prices — specifically CL futures.  We’ve been following this for a long time — first noticing the effect in the Jan and Mar 2015 rallies and writing about it frequently, including this Oct 2015 post: What Really Drives Stock Prices?2016-03-11 CL v ES 0600If you want to know, for instance, why stocks suddenly reversed off their post-Draghi plunge, look no further than the short-term CL chart.  With ES in the midst of a 40-pt swoon, CL suddenly reversed (the yellow arrow.)  In rather short order (and, after USDJPY finally reversed) stocks got the message and rose along with them.2016-03-11 CL v ES CU 5 0618Ditto for last night’s ramp job: all CL and USDJPY.  It should be enough for SPX to top harmonic resistance at 2009.13 this morning.  It will blow up a number of bearish patterns, enabling the rally to continue unmolested.2016-03-11 SPX 5 0618Don’t take my word for it.  Former Fed President Dick Fisher, in a candid interview on CNBC earlier this week, confirmed what many have been sensing for years:

“…we injected cocaine and heroin into the system, and now we’re maintaining it on Ritalin….This has been a hell of a rally.”

Today, the injections are taking the form of higher gas prices.  On February 11, I filled up my wife’s car with regular grade unleaded at $1.94/gallon.  Today, that same station is selling gas for $2.15/gallon.

That 11% increase pales in comparison to the 50% increase in CL over the same period.  But, for anybody on a tight budget, it’s a bitter pill to swallow — particularly when they enjoy few of the benefits of the wealth effect Fisher and his cronies are now crowing about.

No doubt, the Have-Nots’ sacrifice (think of it as another gas tax) is much appreciated by those whose portfolios have increased in value since the Feb lows by — come on, you already know the answer!  — exactly 11%.

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