Higher Stock Prices Could Hang Around If Enough Cheap Money Is Printed


by Dr Joe Duarte
June 11, 2012

What Will Individual Investors Do If Bond Yields Climb Aggressively?

The stock market could move significantly higher this week, assuming that the fine print for the Spanish bank bailout doesn't spoil the market's perception that there is an all out effort, to finally reflate the global economy.

To us, this seems as if the global central banks are now throwing up their hands and crying uncle. The politicians clearly can't seem to understand that the money vacuum left by the derivatives related to subprime mortgages will never be filled until new money is actualy printed and somehow actually makes its way out bank vaults.

The money that was sucked out of the global economy isn't gone. It's in the pockets of those who bet correctly against the subprime mortgage bubble. That means that at some point, that money may be redeployed. Into what and when are the real questions. The fact is that all that cash may never be seen again, at least not in our lifetime, as it may well seed the new line of "old money," the families and the legates of the handful of people who made the right bet.

Now, for the rest of us mere mortals, the task is to see what happens in the next few days. Our bet is that higher prices lie ahead in the short term.

And here is something else to consider. According to recent data, individual investors are responsible for a large portion of the gains in the treasury bond market. History shows that individual investors are often left holding the bag. They know that now and have run away from stocks. The problem for individual investors is that dividend paying stocks have been a better deal than bond yields.

The rally in bonds has led to nice paper gains for small investors. The problem is that paper gains aren't guaranteed. Individual investors don't like to sell. They see the bond market as a safe bet, because they can hold those bonds to maturity and get their money back. But what will they do when the money printing presses hit high gear in the next few months and bond yields start to rise?

Chart Courtesy of StockCharts.com

The S & P 500 (SPX) had a great close on Friday. The index closed above its 200-day moving average and, despite low volume, the action was positive from a breadth and momentum standpoint.

Chart Courtesy of StockCharts.com

Small stocks (RUT) are still not showing the strength that would be needed to fuel a bigger rally. But the Nasdaq Advance Decline line (NAAD) was positive and has made a tentative bottom. This is not an all clear yet, but it is encouraging.

Chart Courtesy of StockCharts.com

The Nasdaq Hi-Lo line (NAHL) contnues to its flattening out. This is encouraging, but not a reason to make huge bets yet. Still, it is a reason to consider putting small amounts of money to work. See our S & P timing section for trading ideas.

Chart Courtesy of StockCharts.com


The stock market is acting like a patient who has had a heart attack but has recovered enough to walk without help.

We are turning slightly positive on a trading basis.

Keep your cash ready to deploy and remain patient.

Trading Plan Review

The market is acting well enough to warrant closing all short positions.

Investors who follow our trading models should be holding large amounts of cash at this point but have put some money to work in the last couple of days on the long side.

Our energy portfolio is long. Our health care portfolio is in cash.

We are in cash in gold market. We are short U.S. Treasury bonds.

Stock of The Day

SPDR Health Care ETF (NYSE: XLV) May Make Some Sense In This Market

by Dr Joe Duarte

Shares of the SPDR Health Care ETF (NYSE: XLV) could be helpful to investors looking for lower volatility and potential gains in this market.

Chart Courtesy of StockCharts.com

Health care stocks have been described as "slow money" by professional traders. And in this market that's quite sensible. XLV has tended to fall less than the market while still gaining when there are up trends.

The combination can be helpful as we wait to see what develops in the next few weeks to months, especially with the election, and with the upcoming Supreme Court decision about Obamacare.

XLV is above its 200-day moving average and has fallen less than the market lately, having nearly regained its 50-day line. For now, considering this ETF may be the best of both worlds for investors who are risk averse but don't want to miss any potential gains if stocks move higher.

If the Nasdaq Composite and the Nasdaq 100 continue to rebound, we would expect this ETF to participate nicely. It also has some Dow Industrial Average components in it, which gives it extra pop potential from big cap mutual fund managers.

Contact information:
email: support@joe-duarte.com
Phone: 434 823-8181




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