Even though the United States is a capitalist system with a free market where asset price discovery is conducted orderly, but the cost of money is decreed by the Fed. The cost of money fluctuates depending on the Fed’s policy. If the Fed is easing, the cost of money is low. If the Fed is tightening, the cost of money is high.
Last week the S&P 500 closed at a fresh new high while waiting for the stimulus package. The main street is suffering from the pandemic, yet the stock market doesn’t care. The stock market has made up its mind that it is a bull market no matter what!
It has been eight weeks since the March 23 low. The Dow and S&P 500 both are under its 200-day moving average. Nasdaq has been above the 200-day moving average since April 22nd. This divergence is reflecting the difference between the digital and real economy. The digital economy stocks continue to perform because
Last week Nasdaq had an outside reversal weekly bar, meaning it traded lower than the previous week’s low and then closed higher than the previous week’s high. When this happens, it is indicative of further momentum on the upside. The Dow and S&P 500 also closed on the strong side on the weekly bar. The short term momentum
The Fed is about to cut rates for the first time since 2008 as the trade war is weighing on economic growth. Are the rate cuts truly needed to support the economy or is the Fed under political pressure to appease the White House? Last time, the Fed cut rates in 1998 to prevent a slowdown caused by the Asian currency crisis. We all know what happened after the cuts.
This time is very similar to the 1998 rate cuts. The economy is not weak and the rate cuts can only create asset bubbles like easy money always does.
Short term, it is over bought with extreme low volatility. A summer selloff is still on the radar. This selloff will create the last opportunity to get in the market before a grand bull market unfolds.
Long term, this market still has room to run.
