The stock market has given investors a wild ride this year.
Fueled by monetary and fiscal stimulus plans, positive investor sentiment and momentum-chasing computer algorithms, the market enjoyed a powerful rally from February to late April.
At that moment, the market became extremely overbought, investor sentiment extremely positive and stock valuations very frothy.
In those conditions, the market became vulnerable to bad news and it was hit when the bleak financial conditions of the European PIIGS governments started to be revealed to the world. The market plunged because of the implementation of austerity packages, risks of sovereign defaults, panicky investors and those momentum-chasing computer algorithms.
After a steep fall during May, the market reached opposite technical conditions compared to April’s highs. Stocks were oversold, investor sentiment was negative and valuations descended to more attractive levels.
This caused value-picking traders and investors to return to the market and cause a sustained advance during the last two weeks.
In these volatile and crazy conditions, the underlying economic fundamentals haven’t changed. Growth in developed Western economies has been fueled by governments borrowing and spending money coupled with lax monetary policy.
Governments have tried to replenish private demand with inefficient government spending that has been incapable of creating permanent and productive jobs. The monetary and stimulus packages have only been “adrenaline shots” that temporarily boosted economic data and corporate earnings.
Once this stimulus begun to fade in Europe, and now in the United States, economic data from the private sector began to quickly deteriorate as the overlevered private sector refuses to spend more money that it doesn’t have.
Last week, the United States got worse-than-expected reports from the Empire State Manufacturing Index, NAHB Housing Market Index, Philly Fed Manufacturing Index and rising unemployment claims.
This week, the United States got a dismal new-home sales report and a gloomy economic outlook from the FOMC, which promises zero-percent interest rates until the end of time.
Bottom Line: The economy is once again deteriorating as government stimulus is fading.
Markets are discounting a new contractive phase in the economy as indexes around the world start to trade below their 150-day moving average, which signals their long-term trend.
Markets will probably remain volatile and with a downward bias, which suits traders but not investors.
When governments realize that there is no economic recovery and are politically pressured to produce “growth” via larger deficits, new monetary and fiscal stimulus will kick in.
This will probably cause another upward surge in the markets.
Until then, be nimble and make a profit by buying fear and selling greed.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here
to read more of his articles.
© 2017 Newsmax Finance. All rights reserved.