Is the stock market at Irving Fisher’s famous “permanently high plateau?” Is that plateau a launchpad for even higher prices? Or is it perhaps a cliff?
Stock Prices Used to Run in Cycles
We used to think that stock prices ran in long cycles. Years ago we had the quaint idea that stocks had a four year cycle.
Liquidity moves markets!Follow the money. Find the profits!
Then the Fed started fiddling with rigging the financial markets by focusing on manipulating the amount of money in the system and then manipulating interest rates. The cycle lengthened.
Then the Fed realized that it could rig the stock market by buying US Treasuries direct from Primary Dealers. Those purchases pump cash directly into the dealers’ accounts at the Fed. The dealers used that cash to buy more bonds, and stocks! They also used it to finance their customers’ stock purchases at near zero rates.
It seemed that the Fed was able to engineer perpetual bull markets.Sure,we had a couple bear markets in Dow Theory terms, but if you blinked, you missed them. There were cycles but the Fed had tilted the playing field so much that the bear phases were hardly worth worrying about.
As I wrote in the current issue of Lee Adler’s Technical Trader:
Long Term Cycles Don’t Matter
Long term cycles won’t matter if the Fed continues to print money at a rate anything close to what it has over the past 2 weeks since it began its “emergency” Temporary Open Market Operations.
Yes, it’s an emergency. No, it won’t be temporary. With a trillion or more a year in new Treasury supply coming to market as far as the eye can see, for the Fed, it’s print or die. And if the Fed pumps that amount of cash into the coffers of Wall Street Primary Dealers, it should skew stock prices upward, until something breaks or the Fed changes policy.
At the moment, the charts show little sign that anything is on the verge of breaking. But we’ll keep our antenna up.
Stock Market Permanently High Plateau Chart
I want to share one chart with you from that report. It shows just what a critical juncture this is, and why the new Fed QE may work, just like the old one worked from 2009 through 2014.
The difference is that that one blew the roof off, starting from the basement. Today, we’re already on the roof. And the roof, the roof, the roof is on fire. You know what I’m talkin’ about, right?
Now about that chart:
To give you an idea of just how fraught the stock market permanently high plateau outlook is, here’s a long term monthly chart. You don’t need to be a genius chart reader to see that this is an extremely critical juncture. If the SPX ends September above 3045, then the next target is likely to be the trendline at 3200.
Looking at long term momentum at the bottom of the chart, it’s pretty clear that the December bottom could have been a major cycle low. An upside breakout here would confirm, and would imply that the market is going significantly higher.
Again, with the Fed printing money hand over fist, this is not only possible, but even likely, unless something breaks. Like what? I think it would require a major financial collapse that overwhelms the central banks. We can’t rule that out, but I think we’ll see technical warnings at least a few weeks or months before it happens.
What might one such warning be? For starters a break of the trendline now at 2900. That would need to be coupled with a downturn in the momentum indicator to suggest that this would lead to a steep market decline.
I track the technical and cyclical stock market indicators for you every week at Lee Adler’s Liquidity Trader in the Technical Trader reports.
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