Sand Spring Advisors LLC
Fed-Induced Liquidity Rallies Past & Present
June 17, 2003
by, Barclay T. Leib
A scant 21 Fibonacci years ago in the late summer of 1982, gold -- already in a bear market that would last for another decade and a half -- experienced a vicious Fed-induced liquidity rally of some magnitude. Volcker was finally easing, and inflation-fever was still in the air from the 1979-1980 bull market in metals.
Today, we see the S&P acting in a very similar fashion -- convinced that the Fed will pull out all the stops to ensure economic nirvana once again. A three-year bear market has done little to squash the positive mentality of investors left over from the 1999-2000 equity bull run.
It is true here at Sandspring.com that we were early in actually predicting this bounce, and that we have subsequently received "tire tracks up and down our back" from having misjudged the upside amplitude of the equity rally that has recently transpired.
But this is indeed a bear market rally within a longer bear market trend. There is no fundamental shortage of equity supply today just as there was no shortage of gold on the market in 1982. There is no burning fundamental reason for stocks to continue to the moon today, just as gold's 1982 upswing from $294 to $515 ended up as a short-lived affair.
Maybe the equity market will top out today. Or maybe we can edge up to 1022 on the S&P and 9450ish on the Dow before a reversal occurs. But note bien from the above pattern comparison: When gold reversed in February 1983, it went from $515 to below $400 (worse than actually shown on the above perpetual futures chart) in a scant 10 trading days. In other words, once the trap door opened, bulls were not allowed much time to escape.
At present, the market is putting a tremendous amount of faith in the Fed to deliver a 50-basis point rate cut next week. But the bond market has sentiment numbers that have been in the stratosphere for several weeks now, and technically appears to already be losing its upside momentum. Investor Intelligence sentiment numbers are also as high on equities as they have been since 1986.
As June slips into July can anything but disappointment in both markets lurk? When the trap door opens for whatever reason, it's going to likely be an ugly rush for the exits.
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