The US financial markets flexed their collective muscle yet again, capitulating several more bears, and sending US equities to new all-time highs. The sheer power of the move in US equities in 2013 has become thematic. And furthermore, when combined with the strength in the US Dollar, there is no denying that from a macro perspective, the US financial markets are on fire. Seems investors are eating US dollars and US equities for breakfast these days.
Humor aside, it is clear that the markets are getting a bit giddy here. And although this often leads to intermediate market tops (I’ll cover that in another “trading” piece), it is also symbolic of the strength in the marketplace, especially from a macro perspective. In that vein, here are a few observations that I think bear mentioning:
1) Large amounts of retail traders have missed the “hated” rally. This is nothing new and something that has been well-documented. However, at these “heights,” it is that much more painful to know that many mom and pops who missed the majority of the US equities rally are just now getting in. Put one in the win column for the Fed… or is it? Depends on if you are an informed active investor or one of the mom and pops making decisions based on psychological pressures. Whether it’s this month, later this year, or next year, retail investors will find their way into the marketplace… likely with horrendous timing.
2) Money is really flowing into our marketplace. Europe is likely a significant contributor, with fear being the motive. In short, money needs to find a home. And one that feels the safest of the options available. Read more by myself and Andrew Kassen on the Euro crisis here and here. Since economic numbers do not fully justify the move higher in US equities, it is likely a combination of asset allocation rotation and currency/market allocation rotation.
3) Bullish Sentiment is finally rising. Last week’s AAII Investor sentiment survey jumped over 9 points to 40.8% and should move higher again when released later today. It is amazing how disconnected many common correlations have become (i.e. the US Dollar), but this one has been spot on: Although moving higher, it has captured the essence of the “hated” rally quite well.
So how do we make sense of these dynamics. Well, point one is a sad truth, but slowly but surely retail investors will find their way back into the fold; I have received more relative/friend inquiries about the market since US equities began hitting new all time highs. That’s good to hear, but also an indication that a larger breather could be in store. But, as I mentioned earlier, I am more interested in points two and three, for if the next correction is due to more European drama or crisis, it may well be buyable, as money pushing out of Europe will need a home. And so far, it appears US equities are the investment of choice.
As a bonus, I’m including a chart of the Dow Jones Industrial Average priced in Euros. You will note that it has yet to reach new All-Time Highs. Should this occur, it would likely be a sign that capital is fleeing Europe, the Euro is dropping, and US equities (and the Dollar) are benefitting.
Thanks for reading. Trade safe, trade disciplined.
No position in any of the mentioned securities at the time of publication.