Monday, April 12, 2010

The Big Question: Why Is the Stock Market Still Going Up?...

....comes in an email from Pedro Mayrinck:
I actively read your blog. My only concern is that this wall of money being funneled into risk assets by the US FED may last longer than you think and drive equities among other asset classes to much higher levels than you imagine. Do you have any comments on this ?

I don't think that it is Fed money that is fueling the market. M2 money supply is showing essentially no growth and the strength in the dollar backs up that view.

Although there was a huge double digit burst of money supply growth between September 2008 and March 2009, I believe most of that has worked its way through the system.

What the panic period (in the fall of 2008) did is scare a lot of people to the sidelines. Remember the DJIA declined from a high of 14,000 to under 7,000. That's a lot of selling. It put a lot of money on the sidelines. I believe this the money that is coming into the market. This is a finite amount of money, not like Fed money printing that can go on and on.

That said, it is extremely difficult to determine how much is on the sidelines. I believe a lot of the technical indicators that some market watchers use will be the best signal to the end of the climb.


  1. Wenzel,

    How do you square what you just said with these two pieces arguing against the existence of "sideline cash" by John Hussman and Mish, respectively?

  2. Well said Wenzel. The best strategy is to invest for the upside while using money management to protect from the inevitable downside.

    There are two answers to Hussman and Mish: (1) The market continues up. This may change but at the moment the direction is up and tryng to predict the future is a fools game; (2) Value is subjective. Anyone who believes they can accurately measure such a vague and changeable term as "sideline cash" and predict where this rhetorical asset will be placed and what its effect will be at any given moment must be related to the Wizard of Oz or working for the government.