Stock market bears think bulls’ buying is misplaced and based mostly on momentum. Bulls counter that they have a thesis: Stocks will rise no matter what happens to the economy and with the deadly virus.
But now the first crack has appeared in bulls’ argument. Let’s explore this with the help of a chart.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DJIA.
Note the following:
• The chart shows the expansion of the Federal Reserve’s balance sheet. As the chart shows, the Fed’s balance sheet stood at $0.87 trillion before the financial crisis in 2008. In March 2009, when stocks rebounded and Arora gave a buy signal, the Fed’s balance sheet stood at $2.08 trillion. In 2018, the Fed’s balance sheet totaled $4.4 trillion.
• The chart shows that when the Fed reduced its balance sheet to $3.77 trillion, the stock market eventually fell about 20% in December 2018.
• The chart shows that the stock market drop scared the Fed, which did an about-face. The Fed started increasing its balance sheet. The stock market took off.
• The chart shows that in October 2019, the Fed started adding liquidity, and the stock market took off to a new high.
• The chart shows that the Fed’s balance sheet stands above $7 trillion today and is on its way to $10 trillion.
• Previously the stock market was levitating because investors were hiding in the five big tech stocks of Apple AAPL, Amazon AMZN, Microsoft MSFT, GOOG, GOOGL and Facebook FB. Now as the Fed’s actions seep into the economy, the stock market rally has considerably broadened.
Here are the four elements of bulls’ thesis:
• If the economy becomes strong, stocks will rise.
• If there is a vaccine or antiviral, stocks will rise.
• If the virus mounts a resurgence and there is no vaccine and no antiviral, stocks will rise because of more money printing by the Fed….Read more at MarketWatch.
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