Markets on the defensive heading into the three day weekend. Even with today's decline, the usual chant for higher prices emanating from business news channels has reached an elevated level of confidence mainly as a result of the repeated bid side momentum carried forth from 2009. Puzzled financial blogs have written about the invisible hand behind the rally in stocks. Foreign purchases, Fed/Treasury manipulation, and other forces have been mentioned as suspects. But the answer is not so mysterious.
Back in the panic of late 2008 and early 2009, participants all became linked in a kind of financial Coriolis Effect, you know, the direction toilet water spins. Normal value schemes were diverted by the force of plunging asset prices including stocks, commodities, and real estate. Massive liquidations to offset remaining risk was gaining velocity and was quite unfriendly to any rational market theory, now known as the useless theory. As prices for broad based assets fell, the otherwise normal attitudes regarding purchase opportunities were replaced by a reluctance to place any bids which had the potential of becoming targets for liquidators. In March, the combination of Treasury and Fed intervention along with declining selling needs, put in place a price level not seen in twelve years and having wiped out generational asset growth. After such a decline, prices naturally began to retrace some of the ranges penetrated during the panic. This in itself provided enough energy to rally based on repricing against diminished selling.
So now what? An up January by some bullish thinkers is the indicator month for all those other months because, well, they really need to have an indicator early to rationalize January purchases. Waiting for February will not work. However, if January is a down month, the bulls use other indicators such as the Chinese Demand Indicator. This is done by counting all the Chinese and dividing by one, the answer or quotient is the number of IPhones that will be sold in the near future. Bullish.
Now this renewed confidence that the worst of all asset declines is over and that the long term bull trend started after the Great Depression has been put back on track, comes from the same basic understanding behind mood modification drugs, that even bad things can look good if you just think they are. But more importantly, good profit seeking efficient stewards of corporate banking and business have adjusted to the cleansed market place. Your cleansing not theirs naturally. Further, increased vigilance by congressional investigations, Federal Reserve preparedness, and Treasury oversight, will be sufficient for a new bull phase.
Well, that is the plan anyway.
