The nonfarm payrolls report came in below estimates yet stock markets powered ahead yesterday. We are back to the situation where bad news is good news. Investors are addicted to stimulus so if the news is not favourable, the economy will weaken and the Fed will continue to print money. That’s why stock markets went up yesterday. The question I ask is: why investors (or I should say those who buy this market without thinking) do not see the danger ahead?
If this situation continues (bad news is good news) the bull market will end. Why? Because there are only two scenarios, either 1) the bad news continues and the economy goes back into recession/contraction or 2) the economy improves and the Fed stop printing.
Let’s not forget that the massive sell off we saw during May-June this year was prompted by fear of tapering. Bad news is never a good thing for the stock market. Bull markets are built on good news is good news.
Prior to the credit crunch period the bull market generated good news. The good news in turn drove investors to buy. Today things are different, the people who push the stock market to new highs do it for the wrong reason. Do they really know what they are doing? I don’t think they do.
The recent economic numbers do not support a rally. Over the last two weeks I recorded the following:
22/10/13
US nonfarm payrolls, worse than expected
17/10/13
UK retail sales, better than expected
US jobless claims, worse than expected
16/10/13
UK claimant count, better than expected
10/10/13
US jobless claims, worse than expected
09/10/13
UK industrial production, worse than expected
Economic reports not shown during the period were in line with expectations. Earnings reports are not mentioned because they have been mixed. The bottom line is that the news has been negative since the low on 9th October, yet the S&P has rallied to a new all-time high.
I’ll tell you why investors are pushing markets higher, they are buying because sentiment is bullish. My e-Yield Sentiment Indicator turned bullish and that’s why they are buying. I can’t say for how long sentiment will remain bullish but as long as it remains bullish the stock market should continue to advance. Stay tuned for the next turn…
Thierry Laduguie is Market Strategist at www.bettertrader.co.uk
PS: I will be speaking on the subject of sentiment and stock prices at the Society of Technical Analysts on 10th December. For more information see http://www.sta-uk.org/events_meetings.html