It really baffles me that the rally has been against a backdrop of weak fundamentals, namely:
1) US corporate earnings fell for a third quarter in Q4 2016. That's three quarters in a row, a clear sign of a earnings recession
2) The PMI for manufacturing and services are in contraction mode
3) Jobs numbers which are continually and seasonally "adjusted" but point to the fact that more minimum wage jobs were created rather high paying skillful jobs
4) Continued growth in global debt
5) Poor GDP numbers - So the Q4 GDP was revised up to 1% from 0.4%. That vs the GDP of 3% - 4% n the 1990s without any QE!
Perhaps it has a lot to do with the rise in the price of oil which rallied almost 47% off their lows. But based on what fundamentals? A freeze in production which is already at record levels? With US being a major producer not being involved in the "talk" and now warns OPEC that production will resume production at a blistering pace once oil reaches US40 per barrel? The only fundamental that I know of is that Supply is outstripping Demand and as long as that occurs, any rally has more to do with hope than fundamentals.
Oil price will continue to rally eventually but not until the costly producers are out of the equation. This could happen very soon - by the first half of the year - as many of these costly producers are already financially distressed.
Despite poor earnings we continue to see the rally in the US indices. This is mainly due to the following:
1) A huge short squeeze as investors and hedge funds made bets that the major indices, oil, commodity and financial stocks would trend lower going into 2016. The rise in the price of oil and other commodities caught everyone off guard.
3) A wave of corporate buybacks after the market fell to its February lows. Here in lies the danger. Companies are borrowing money to buy back shares just as when they (the shares) are still in their highs against a backdrop of falling net profit. Won't this burden the company further? Apparently not to the senior management who cashed out their share options.
4) Continued hopes for stimulus after stimulus whenever the market tanks or when poor economic data prevails. More QEs, ZIRP and NIRP only creates more money and thus greater currency debasement. Assets price will grow but it is artificially inflated. Bubbles are artificially created. Price discovery is lost.
At some point, people will watch the actions of the Central Banks in disbelief and move into precious metals. This is when the people has lost all faith in the policy makers and price discovery will come back disastrously.
The coming week will be interesting. Here's what to look out for:
1) The 4 week long rally is now in overbought territory. It might go up further with the anticipation that the Fed will not raise rates in the coming meeting, or the language of the Fed changes to accommodate further easing down the road.
2) Any of 1) above, will lend support to the price of precious metals, and we could see a gold and silver rally as the US$ weakens.
3) Oil rally will likely to discontinue as the March 20 "talk" between OPEC and Russia becomes a none event. Iran has already indicated it will not attend. Also focus will return to oil storage capacity as it hits critical levels.
Of course, the Fed could surprise everyone will an interest rate hike, and this will put a stop on all rallies - the stock market, commodity and precious metals (albeit temporarily). There will be a rush into treasuries. However the impact in the economy will be severe. After a reactionary fall, precious metals like gold may regain its positive momentum as it is the ideal hedge against inflation. This is reminiscent of the 1970s - 1980 where gold rallied more than 300%, and event which coincided with interest rate spikes.
The above are just my opinion. You are encouraged to do your own research.
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