This Makes the Market Roar

adam_woodsIt is important to step back every so often and look at the forest (intermediate/long term action), not just the trees (short term action), and that is the primary purpose of this update. Looking back can give us some insight into the future, as well as give us hints about where exactly the market is now.

While it may seem counterintuitive that the market can continue to climb when much of the economy feels downtrodden, a peek back at recent history makes it clear. And a little bit of digging into the past can show exactly what makes the market climb higher.

Strong Month & Quarter:

Barring some unforeseen massive decline before the close today, the benchmark S&P 500 (SPX) is on track to close higher for the month and quarter. Q2 was a very strong quarter for stocks, and we are in one of the longest quarterly win streaks in history. The SPX has not had a down quarter since quantitative easing (QE) began at the end of 2012, known as QE3, which is when the Fed jumpstarted the economy by buying securities and Treasury bonds with new money.

Eventually the market will pull back, but until it does it is important to resist the urge to fight this very strong tape! Additionally, the SPX has only had three down months since QE3 began back in Q4 2012, which is very bullish.

The Fed Put:

I’m often asked “why is the market able to rally even though earnings and the broader economy remain lackluster at best?” My answer is that the only thing that matters is the Fed; everything else is secondary. And the Fed does what it wants, such as relentlessly printing money.

This concept was first introduced by the legendary hedge fund manager David Tepper over 4 years ago and became known as the Bernanke Put, now called the Fed Put. The idea is that the Fed will step in and do whatever it takes to support Wall Street if the market decides to fall (for any reason). So it is a matter of time until Main Street catches up and kicks into gear.

Easy Money (QE) Matters:

Keep in mind when Q1 ended, the SPX fell 17%. When Q2 ended, it fell 22%. Meanwhile, when QE of some sort is present, the market roars higher. Remember, the market looks forward and fundamental data that is released, by definition, looks backwards (tells you what already happened). That’s why whenever any economic or earnings data is announced we always ask, “How will the Fed react (more or less easy money)?”

Future Looks Very Strong For Midas Readers:

Midas Wave members have done very well and we look forward to a very strong second half of the year. The good news is that since the March 2009 low, the second half of the year has been much stronger than the first half, which is why we are looking forward to a very strong second half of this year and beyond!

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