The biggest news to catch my eye came from a guy called Dennis Gartman (who writes The Gartman Letter), who changed from expecting a correction to posing the suggestion that maybe we’re in a market melt-up.
This is the opposite of a meltdown when market indexes collapse, as we saw in 2007 and 2008 ahead of the GFC. Meltdowns are triggered by a shock geopolitical event, such as September 11. That’s why we have to be wary of the Russian-Ukraine problem — or when it looks like a recession is on the way, maybe because banks lend to the wrong people and debt ratings agencies wrongly rate risky products as AAA!
A meltdown could be as little as 10% but could go to 50%, while melt-ups have been 20% to 100% events. If this is a melt-up, it will be a more restrained one.
The key causes are good earnings reports (and the US has got them), a strong economic recovery (I think that’s happening) and decreasing interest rates. This isn’t going to happen but the current issue the market is wrestling with is: will the Fed start raising interest rates as early as March next year? This is becoming more talked about since last week after the Fed minutes were released but the majority still thinks it will be next June or September.
Janet Yellen, the Fed chairman, was a little dovish over the weekend rather than very dovish and that could have helped the Dow and S&P 500 register a small loss. However, there was also the Russian truck convoy that drove into Ukraine, apparently for humanitarian supplies reasons, but the Ukrainians insist they were carrying weapons.
Would Comrade Putin do something like that?
This whole affair limits market enthusiasm, despite the fact that interest rates, the economic recovery and company news support stocks heading higher. Without doubt, if Yellen said we won’t move until June or September, a melt-up would follow but that’s like telling Islamic terrorists that you’re pulling out of Iraq — it’s not a great idea.
This is what Gartman told CNBC:
“The correction happened a couple of weeks ago. You had a very severe 3.5-4% correction, went right down to a trend line, now you’re taking all of the news that I think is relatively evil for the market, expectations of tighter monetary policies, being brought closer rather than being deferred, the market has accepted that very well and here were are up 95 points on the day, I think you’re having a melt-up not a melt-down. And I think stock prices still want to go higher. The trend is up and all the smart guys I know keep trying to fade this thing. I’ve even tried to fade it at times and every time you do it’s been wrong. It keeps wanting to go higher.”
Gartman thinks this rally ends when trend lines are broken and previous market highs become persistent resistance points. This year, the S&P 500 has made 28 all-time highs. When this sort of thing stops happening, that’s when the overdue correction will have to happen.
The time to worry is when bears become bulls and the large amounts of cash on the sidelines start rolling into stocks. I’m defining what Sir John Templeman refers to as the “euphoric” stage of a bull market when you get ready for the “end in tears” stage, which is a market meltdown.
I know I’ve had recent doubts about my 6000call on the S&P/ASX 200. That was not me doubting the bull market but when our dollar will fall. If the US economic recovery keeps getting stronger, then the March rate rise for the Yanks becomes more expected and our dollar could dive. If this happens when the US enters its usual pre-Christmas or Santa Claus rally, then we could have a big finish to the year and my 6000 could easily show up.
However, if Yellen goes more dovish again, then the market will punt on a June or September rate rise and our dollar will remain on the high side and this could hurt my call.
Gartman, like David Bassanese, my colleague at Switzer Daily, who is ex-AFR and now chief economist at BetaShares, thinks this bull market has two years to run. I love reading that but we will keep pressure testing these guesses — don’t you worry about that, as Joh Bjelke-Petersen used to say!
I know September and October are bad months but the VIX or fear index is a low 11.47 and the economic news in the US going into the third year of a presidential cycle is generally good for stocks. I’m only worried about Putin. By the way, there’s an important meeting this week in Minsk, which Germany’s Angela Merkel will attend to try and thrash out a solution to the Russian-Ukraine issue. An agreement would be great for stocks.
Finally, one bear has turned bull with Barry Bannister, chief macro and portfolio strategist at Stifel Nicolaus, now putting his year-end target on the S&P 500 index at 2300, which is 20% higher than his previous 1800 level!
Don’t worry, I’m counting bears that are turning bulls and the count is not very high. In fact, George Soros is in the opposite camp.
I’m sticking to my slow melt-up call. I’m just not confident on the pace.
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