"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, March 25, 2011

The Seeming Unstoppable Rally in US Equities

One of the things that has really struck me has been the comments of many of the analysts and guests on the financial TV this past week in regards to the rally in US stocks.

The common refrain seems to be something along these lines:

"Well Joe, this market has had TWO BLACK SWAN Events thrown at it in two week's time and it simply will not stay down. Whenever you see a market that does not respond to bad news and actually begins to shrug off that news and moves higher, you JUST HAVE TO BUY IT".

It is always fun listening to some of these analysts scratch around for reasons to explain this stock market strength especially when some of these same people will point to the poor labor markets and broken housing market as reasons for concern. Some go as far as expressing great hesitation over further strength given the sharp rise in crude oil and related energy prices. They sluff that off however and will point to the global growth factor as reasons for the rally in the US equity markets with that overiding everything else.

The simple truth is that the world is awash in liquidity and this liquidity is finding its way into both stocks and commodities. It is so massive that it just overpowers anything that gets in its way. In such an environment most traders are simply afraid of being short. What happens as a result of this unwillingness to aggressively sell is that it takes less and less volume to move stock prices higher because sellers are scarcer and price must move high enough to entice sufficient offers into the market to accomodate all the orders to buy.

Take a look at the following chart which I have posted previously here at the site but which I think needs frequent reference to remind us how important this liquidity has become to maintaining the rally in US stocks.

Note the sharp expansion in the Fed's Balance sheet near the beginning of this year and note how it just keeps on rising. It is that measure of liquidity that swallowed up the selling due to unrest in MENA and the tragedy surrounding Japan.

The Fed may be floating a trial balloon by talking about an end to QE to gauge how stock markets will actually react to such an event  but one has to wonder how shutting off the liquidity spigot, based on this chart, is going to affect the high flying equity markets.


  1. The 3 major brunt and brute forces causing to propel the Dow's insane ascent: 1) QE 2) many Companies are sitting on huge tons of cash and are buying back their own shares and, last but not least, 3) institutions are conducting window-dressing stock purchases of seasoned illustrious and prominent Companies in order to have their portfolios reflect that in the past quarter they've been on top and on board this party - even if they buy shares on March 31st; it'll be interesting what will happen to the Dow and other Financial Markets with the advent of the heralding of the new month (next Friday) and the curtailment of their buys…

  2. The FED has painted themsleves into a corner,and unless we who have eyes are "just not getting it" the "RECOVERY" which certainly doesn't include everything is near soley dependant on FED liquidity stream...also shown in recent ADJ M BASE DATA. The very thing they claim to want to help, hasnt been THE HOUSING MKT...in the meantime savers get hosed and others are focred into riskier invesntion seeking return....this forced manipulation, buble blowing, how's that usually end up?

  3. Who the feck is getting all that money,
    it sure aint me.

  4. Hello Trader Dan, I read your post regularly. What's the difference between your chart of the Feb balance sheet and the chart of montary base by Graham Summers in Harvey Organ's blog here http://harveyorgan.blogspot.com/2011/03/raid-in-silver-and-gold-failmonday-is.html
    Are they the same chart with different title? because they both hit around 2.5 trillion on the top. Many thanks

  5. Dan, true about the talking heads. In early 2000, I can still hear them say "the tech sector is making new all-time highs and will go up forever because it is the future. It will not correct any time soon, even though it looks top heavy because this time is different".

    They laughed at and mocked Schiff when he warned of the housing bubble.

    When one of the shills come on the financial TV and says, "Joe, with gold at $10,000 an ounce and silver at $750, we are extremely bullish that this just keeps going up", I'll know it's finally time to sell.


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