Written by Gary
Weekend Market Commentary 'The reason(s) why the markets won't crash'!
UPDATED: 0845 EST 2014-07-19
When I say crash, I mean the actual average's numbers will not waterfall as they did in 2008/2009, but experience a slow, methodical decline with occasional pop-ups. This is also true for the continuing upside march of this bull market.
Several years ago I wrote that the mom and pop investors had left the financial stock market after getting slammed in the 2008/2009 bear market, now known as the '2009 Global Recession'. The only ones left standing were the investment houses that now held the bulk of equities, outnumbering remaining retail investors and couldn't sell anyway. But what is this 'holding' of securities doing to the markets in today's financial climate and culture?
This 'holding' is creating a stable market that is not likely to fluctuate widely or produce the volatility we saw back in 2008/2009. It will move in ways we have been witnessing for several years before because they are not going to sell, but why?
But there are many reasons why the institutions dare not liquidate large block holdings in any market, bear or bull. More importantly, why would they want to reduce their holdings in the first place? Seriously, where would they invest the cash?
In today's environmental slow moving financial conditions many, including the large financial concerns, may find themselves solidly in a bear market before they even realize it and may be to late to sell. Let's look at the basics and see if you agree.
One is the real threat of a World financial collapse. It would certainly happen if the large financial institutions suddenly decided to move to alternative assets along when their panicking retail cousins decide to jump ship. A one hundred dollar a share issue would suddenly be valued a pennies when billions of dollars worth were put up for trading and a lot of folks jumping out of windows.
Another would be their reducing their holdings at their own demise. Assuming they are not up to their arse in debt or extreme liabilities in risky assets as in Lehman Brothers, then these financial behemoths would hunker down and wait out the storm. Selling to cover losses would probably not be the wisest thing to do, at least in large numbers.
The large institutional houses of investment holdings really have no reason to cash in their chips as most are structured to 'wait out' dips, corrections and have cash to 'play' the dips. Hence, the moderate, minor corrections and slow moving charts we have witnessed the last several years. If need be, they could trade very large blocks in the 'Dark Pools' and never cause a ripple in the retail end of the retail markets.
In the meantime, this brings up the reason why the markets will continue to rise in the near future and not 'crash' as many have speculated. One reason is that the retail investors, affectionately called 'Sheeples' have been buying into the markets lately helping push the averages to new highs with additional help from the HFT algo computers. I expect 'Sheeple' buying equities numbers will increase exponentially over the next 12 months as the lure of hidden riches flood their uneducated and unsuspecting minds.
Another is the Feds are finding no urgent need to unwind it bond holdings. As a result this will have a abnormal high supply of accumulative liquidity as explained below. My problem with James thinking (below) is that this 'liquidity' issue is it will run out sooner than two years, much sooner in fact.
James A. Kostohryz writes, "This process (liquidity preference ) could take one to two full years to fully run its course". In his article below he explains how the markets are posed to shoot the markets higher after QE ends which could be the 'last straw' breaking the bull's back.
After the taper: Abnormally high supply of accumulated liquidity + normalization of liquidity preference = surging asset prices.
Almost by definition, the taper will end just as risk aversion and liquidity preference have barely begun to normalize.
In this context, stock prices will probably rise sharply for 1-2 more years, but with valuations already stretched, this will be an unprecedented and treacherous time in US history.
We mentioned above the Fed has no immediate need to unwind their bond holdings and that will also contribute to the continuing bull run.
The Fed has no urgent need to unwind its bond holdings, and good reasons not to do so. The central bank is banking on inflation to inflate away the problem.
In such settings, the stock market will continue to march upward and onward thanks to the ample liquidity.
Which, in a nutshell, explains why the Fed is tough on banks: To keep speculative excesses and imbalances from having systemic consequences in this golden age of liquidity.
Below Cam discusses the euphoria of the collective conscious of the 'Sheeple' and why they are buying into the markets and will continue to do so.
Recently, there have been a number of bearish warnings about the equity markets. No doubt there have been signs of froth, but how much frothier can the stock market get? Cutting to the chase, my conclusion is we are seeing the initial stages of a stock market mania and that it will have a lot longer to run.
Just as my former colleague Walter Murphy termed "good overbought" to describe overbought conditions in an uptrend, I believe that we are seeing the start of a "good" stock market mania.
The markets will eventually experience a decline, enter a bear market and then what do these institutions do. What will the 'Sheeples' do? Will it be different this time?
As a closing thought, the markets won't 'crash' for many of the above reasons (and more), nor shoot up like they used to do, instead they will melt up and down slowly as they have been doing. So don't look for a 'Shooting Star' candle to signify anything as it won't happen - not now anyway. For that to happen we need a new large crop of 'Sheeples' to be sheared.
Your opinions are welcome and would love to hear from you.
(Follow Closing Market Averages at end of this article)
WTI oil closed Friday at 102.98 (down -0.36 -0.35% )
Brent oil closed Friday at 113.21 (down -0.04 -0.03% )
Gold closed Friday at 1309.10 (down -7.80 -0.59% )
Copper closed Friday at 3.188 (down -0.038 -1.19% )
If you would like to get advanced buy/sell tweets, sign-up in the column to the right of this post by clicking on the 'Follow' button. Write me with suggestions and I promise not to bite.
Friday's Closing Market Numbers
To contact me with questions, comments or constructive criticism is always encouraged and appreciated:
Written by Gary