Bull Market in a Bear Market— Why Stock Prices Are Going up

Welcome to Profit Confidential • Monday, February 28, 2011

Bull Market in a Bear Market—
Why Stock Prices Are Going up

By Mitchell Clark, B.Comm.

What a difference six months makes. Last summer, investor sentiment was so bad that stocks were selling off on good corporate news. Now everything seems rosy again. The stock market is going up, commodity prices are strong. All an investor has had to do over the last six months is just own the market. So why are things rosy on Wall Street and only mediocre on Main Street?

The answer lies with the Federal Reserve and the central bank’s policy to keep the world awash in cash and interest rates artificially low. This helps Wall Street much more quickly than it does Main Street. Traders and investors would rather place their bets on stocks over real estate. It’s all about liquidity and the ability of investors to trade within it.

Eventually, though, the central bank is going to have to reverse course. It can’t keep pumping up the system forever. The hope among monetary policy makers is that the economy will be strong enough to grow on its own and then the Fed can withdraw some stimulus without negatively impacting the economy. What’s holding the central bank back from raising interest rates right now is mostly the employment situation. The job market isn’t healthy enough yet for changes to the monetary policy, but the stimulus is creating price inflation on Wall Street (stocks and commodities). It’s not yet happening on Main Street (jobs and income).

So, we have a situation where the stock market keeps ticking higher, even in the face of major uncertainty in the Middle East. Institutional investors are happy to buy stocks, because corporate earnings are growing and interest rates are so low. It’s a perfect world for Wall Street and there is a lot of hope out there. Investors are buying stocks based on those hopes and it’s the typical move: buy on anticipation, sell on the reality. The reality, however, has yet to reveal itself.

The stock market is due for a major correction, but it needs a catalyst. So far, geopolitical uncertainty has proven to barely affect sentiment. Even lackluster employment numbers and flat housing prices can’t dent investor enthusiasm at this time. We have a bull market in an overall bear market, and it’s all because of the Fed.

Large-cap indices should continue to do well over the near term, because so many of these businesses are well diversified internationally. Asian operations are providing the growth, while European and American operations are slowly improving.

The right shoulder on the S&P 500 Index continues to form and it’s eerily similar to the left shoulder. Pull up a long-term chart on the index and you’ll see an amazing pattern that’s very symmetrical. It certainly leaves you wondering what the next major price trend will be. Whatever it is, it will be due to inflation.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.