European Central Bank President Mario Draghi turned ultra-dovish in a speech in Portugal on Tuesday.
Draghi is almost pre-committing to more monetary stimulus as risks rise. Is this a motivation for Federal Reserve Chairman Jerome Powell and his cohorts to cut interest rates as they meet this week?
President Trump on Tuesday blasted Draghi because stimulus in Europe means a lower euro versus the dollar, giving an edge to European companies in their exports to the U.S. On the other hand, the U.S. stock market is encouraged by Trump’s tweet of a “very good” phone call with President Xi of China and the news of an extended meeting with him at the G20.
Let’s explore the good and the bad of these moves for stocks with the help of a chart.
Please click here for an annotated chart of S&P 500 ETF SPY. Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, Nasdaq 100 ETF QQQ and small-cap ETF IWM.
Please note the following:
• Stocks compete with bonds. Bonds rise when interest rates fall.
• Lower interest rates are likely good for the stock market in the short term.
• The bubble is already developing in debt, both government and private.
• Lower interest rates will simply enlarge the bubble.
• Bubbles eventually burst. Of course, it is difficult to call when this bubble will burst.
• The chart shows resistance for the stock market.
• Resistance becomes support for stocks when the price crosses above it.
• The relative strength index (RSI) on the chart shows there is room for the stock market to run.
• Volume shown on the chart is relatively low. This indicates that there is not high conviction in this rally in the stock market.
• Irrespective of significant risks, popular large-cap tech stocks such as Facebook FB, Google GOOG, GOOGL, Amazon AMZN and Apple AAPL are running up. Investors find it easy to park money in those highly liquid stocks.
• There are short squeezes in new IPO stocks such as Beyond Meat BYND, Fiverr International FVRR, CrowdStrike CRWD and Zoom Video Communications ZM…Read more at MarketWatch.
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