Gary from China on the markets…

By Gary Kaltbaum

March 21,2016

Greetings from Beijing. Fascinating place. The Kaltbaum bucket list continues to get checked off.

Yesterday, we visited Tiananmen Square, the Temple of Heaven and the Forbidden City. Humongous, expansive and spectacular architecture come to mind. Today, we hit the Great Wall and Summer Palace. To be clear, the Great Wall is the most amazing place we have ever been to. We have no idea how they were able to accomplish such a gargantuan undertaking. Here are the facts from wikipedia:

And now, back to the markets.

On February 11 and 12th, we thought and we told you that a low was being put in for the market.  When we see a low, our thought process is always the same. We never know how long a rally will last or how far it goes. We did believe that this rally could be better than some of the anemic rallies we had seen recently. But this has been a damn good rally, a rally that is persistent, a rally that sticks, a rally that confounds and a rally that is now driving the bears up a wall. This is the exact opposite of what we saw into the lows of February 11 and February 12. The most important part of the action has been the recent turning of the corner of all the areas that we had been bearish on for over 18 months. As we had told you, we thought that energy, oil and gas, steel, copper, aluminum, metals and mining, commodity countries, emerging markets and everything that led the market down for 18 months were now turning the corner. Once that occurred, they started leading the market up. Instead of the advanced/declines and the average stock doing so poorly, the advance/declines and the average stock lead. In other words, a drastic change in the market’s complexion. We are now seeing many other areas turning the corner.

Before we go further, it’s important to take a step back and understand how we look at markets. As technicians first, we care first and foremost at what the market is doing and not the opinions of pundits, either bullish or bearish. The fact is there were not many people more bearish then us before the low was put in. But we saw the market’s complexion change and like Gumby, we are flexible.

But as fundamentalists also, we do not believe anything has changed with all the negatives that are still out there. We can spend hours listing them. The short list is the trillions and trillions of debt that pervades the globe, the yearly deficits that pervades the globe, the government takeover of industry in so many countries including our own that pervades the globe, the government takeover of markets that pervades the globe, the assinine, assiten, asseleven monetary policy by central banks around the globe which is now including the ultimate in stupidity, that being negative interest rates. Remember, logic dictates when you rig interest rates, when you manipulate interest rates, you are now taking away the ability of investors to measure actual risk in the marketplace and longer term, this can and will only end badly. When all is said and done, there will come a time when the market shoots a certain finger back at these people. There is no doubt in our minds that that certain finger was being extended over the past couple years. There is also no doubt in our mind that the central bank geniuses recognized that so guess what they did? They ramped up the easy money even more then we have seen over the past 7-8 years. Negative rates? Why not go deeper into negative rates? Printing of money? Just keep printing more and for a longer period of time. And in this country, despite being told the economy is sound and the unemployment rate is 4.9%, Mrs. bubble decides to stop raising rates dead in its tracks after only a quarter point rate hike. The simple question is what exactly are these people scared of? We think we know.

EVERYTHING IS FINE AS LONG AS MARKETS COOPERATE

Everything is fine as long as markets cooperate. That is been our mantra since Bernanke decided to do the grand experiment back in 08. We don’t think Bernanke knows a lot but we think he did know that it was the markets that put Lehman, Bear Stearns, Merrill and the rest out of business so it was a must to get the markets going back up. Every time markets dropped, just add more steroids. Fast forward to the past month. What did central banks do? You got it! After 15 to $20 trillion of printed money, just print more. Negative rates? Go more negative. Markets have a down day? Just have government buy up the market. Just ease more. Defend the markets at all cost. These people don’t even pretend any more. In their speeches, they talk more about the markets than the economy. If they printed $15-20 trillion, why not $30-40 trillion? Why not negative 5% rates?

EARNINGS HAD BETTER START TO MOVE HIGHER

Earnings had better start to move higher. If earnings do not start to move higher, then all that is happening here is that markets that already have a high valuation will only have a higher valuation and at the end of the day, there will be a lot more pain. The one bit of good news for earnings is that all of the central bank moves are now starting to crush the dollar. A lower dollar typically means higher commodity prices. Higher commodity prices lifts an anchor off the markets (for now). On top of that, our multinationals benefit as the weak dollar helps out earnings and sales.

BACK TO TODAY’S MARKET

Markets remain very overbought but the fact that they can get this overbought is actually good news. We suspect a pullback could happen at any time but we could’ve said that a few days ago. This has been a persistent move as technically, a ton of stuff has turned the corner. Keep in mind most major indices are down for the year and many are where they were two years ago. But leave no doubt, the permabulls are now smiling while the permabears are again making excuses.

We suspect the next few weeks will tell the tale of this market. We suspect the massive resistance just ahead could stall things a wee bit but leave no doubt, the turning of the corner of so many areas is meaningful and until severe distribution shows up again, it is best to not fight what we are seeing. Just keep in mind, rampant bearishness has turned into rampant bullishness in just a little over a month.

We leave you with one important statistic. The last good rally off the lows occurred in late September 2015 and lasted about five weeks before topping out again. That gain was 13.3% for the S&P 500. This rally has moved 13.2%.