Stocks are finally showing a willingness to ease up on their bull run, if for no other reasons than to do some much-needed technical consolidation and to digest the latest news. You might say they are pausing to take in the view from these lofty heights—especially the Nasdaq, which hasn't seen this level since 2000…when it was moving rapidly in the other direction.
Volume remains light, and a real breakout attempt likely will need broader participation to get follow-through. Still, the Fed's actions have rendered undesirable any alternatives to stocks, and Warren Buffett continues to extol the virtues of stocks over cash, bonds, or gold. So stock market bulls definitely have friends in high places for the time being.
Among the 10 U.S. sector iShares, economically-sensitive Industrial (IYJ) was hit the hardest on Wednesday, although Basic Materials (IYM) is the biggest loser for the week so far. Energy (IYE) along with defensive sectors Consumer Goods (IYK) and Healthcare (IYH) have shown relative strength this week.
Have you taken a bite of Apple (AAPL) yet? It seems that the juggernaut's legions of followers and investors are growing in leaps and bounds, and loyalists just can't get enough of anything and everything the company produces. On Wednesday, AAPL reached above $526 before falling precipitously starting around mid-day. Its recent strength might have been driven by rumors about an imminent unveiling of an iPad 3 that supports 4G technology, which would be huge. Not everyone is aware that Apple's products employ only 3G technology, and anyone who has experienced 4G speed knows there is an incredible difference. The stock is still rated StrongBuy in Sabrient's quantitative ratings algorithm, with a near-perfect Growth score of 99.
On Wednesday, China expressed its commitment to invest in Europe. Also, economic reports were good, with strong industrial production, New York manufacturing, and homebuilder confidence numbers. However, the FOMC minutes from its late-January meeting showed only a few members favoring further quantitative easing. But the biggest downer was talk that the EU might postpone the next round of aid to Greece on doubts that the country will have the fortitude to follow through on its promised austerity measures.
To be sure, the masses in Greece are throwing quite a tantrum over what they are being asked to endure, and they are convinced that destruction and protesting will make the powers that be knuckle under yet still come through with a massive bailout that lets Greece "stay whole." I guess the thinking goes that the world cannot handle a Greek default on its debt, so a bailout "must be" imminent even without the severe austerity measures. It's a game of chicken.
Unfortunately, Portugal's experience so far in implementing severe austerity measures last year has not yet proven effective. Their economy has shrunk, leading to an increase in the ratio of debt to GDP. The prospects for Greece are even worse, as their economy is already in shambles.
But I've been reading some compelling arguments (and historical examples) about how a default on its debt might be a comparatively better option for Greece by allowing a process labeled "creative destruction" to cleanse its dire situation. Economist Joseph Schumpeter championed this as an important aspect of capitalism's ongoing economic renewal and innovation. Otherwise, you are essentially keeping the dying beast on perennial life support. A lot of smart people are struggling mightily with these issues.
Here in the U.S., we have our own questions about whether government actions will help or hinder our ability grow our way out of our predicament. Through "Operation Twist," the Fed has been manipulating the long-end of the yield curve. Since October (which is also when this stock market rally launched), the Fed has bought over $50 billion in new 20- to 30-year Treasury bonds. They have created a bubble in the bond market by buying up bonds in order to lower those rates so that interest on government debt and mortgage rates remain low. Once Operation Twist ends the Fed may have to implement QE3 to prevent bond yields from soaring. In fact, San Francisco Fed President John Williams gave a recent speech in which he implied that the Fed was indeed prepared to implement QE3. This, too, is keying a fire under stocks.
In a recent Sector Detector column a few weeks ago, I talked about the low levels of the M1 multiplier (actually it is well below 1.0, indicating less than a dollar in economic value for each dollar injected into the system), as the Fed has kept the banking system flush with cheap cash but the banks have been reluctant to lend it.
Along this same line of thought, the eminent Charles Schwab himself wrote an op-ed for the WSJ last week on February 6 in which he described "a massive rise in liquidity but negligible movement of that money." He believes that the Fed has sent "a signal of crisis, not confidence," and so companies aren't borrowing to invest and banks are loath to lend.