STAFF NEWS & ANALYSIS
Why We're Not Sneering at the Averages
By Staff News & Analysis - November 18, 2013

S&P 500 Will Be at 2,000 Sooner Than You Think … Craig Johnson of Piper Jaffray has some bad news for the bears. The S&P 500 (,GSPC) is going to hit his long-time target of 2,000 and it's going to happen sooner than most people think. Johnson is well aware of the fact that a lot of the "smart money" is going to take the other side of his call. Five years into the bull markets it's become quite trendy to sneer at the market. – Yahoo Finance

Dominant Social Theme: Equities are where it's at.

Free-Market Analysis: In this case, we're aligning with a primary dominant social theme, which is that the stock market is on the way up. We can see here that this meme is being enunciated once again … and we are not surprised.

In fact, as regular Daily Bell readers know, we've been explaining this meme for a quite a while and predicting its continuance and expansion. We've had clear reasons for doing so that have to do with an opportunity to anticipate an equity event based on an understanding of elite intentions.

These include the JOBS Act, which allows private firms to advertise to a broad cross-section of the public, the arrival of fracking that seems to ensure lower or at least predictable energy costs (at least for now) and the ascension of Janet Yellen who is firmly committed to a continued policy of loose money as the head of the Fed.

Mind you, we are not endorsing any of this. On the other hand, we live in a real world and if we can use our knowledge of elite memes to anticipate an opportunity, then we may wish to consider it. We may not wish to take advantage of it, but at least we know.

And in the case of this particular meme, we can see it building. Here's more:

Whether it's a snarky desire to bet against the masses or an excuse for having not participated in a 52-week rally in excess of more than 30%, more and more institutional investors are loudly jumping out of equities. Unfortunately those jumping out of equities don't have anywhere to go. That lack of alternatives has been pushing stocks higher for years and the wind is only picking up.

"You need to own equities if you're going to continue to be a long-term investor," Johnson offers. Bonds look dicey but yields offer little reward, gold demand is at a 4 year low, the SPDR Gold Shares ETF (GLD) is locked in a bear market, and those sitting in cash looking for a pullback have been stuck on the sidelines for more than two and a half years.

Perhaps best of all, the mood towards equities is grudging respect at best. Money is flowing in but no one anywhere is pounding the table on valuation. The bullish case is based on a slow-growth economy and lack of alternatives.

Let's unpack this a bit. We can see from the first paragraph above that equities are a potential investment because investors "don't have anywhere to go." This fits right into the perspective of some that the dollar has been manipulated up against gold. Of course, no one knows for certain and a case can be made that corrections are part of the natural scheme of things …

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The third paragraph offers the classic "mass psychology" reason to expect a higher valuation. No one is especially enthusiastic about equities but that may make them more attractive. After all, markets regularly climb a "wall of worry."

Of course, there are plenty of perspectives that take the other side of the argument. The Motley Fool recently published a piece along these lines entitled, "Three Bubbles That Could Be Ready to Burst." One was the IPO bubble:

The U.S. IPO market … This has been the busiest year for initial public offerings, or IPOs, since the financial crisis hit, with 139 companies going public year to date through Friday. This year alone, 23% of those offerings have priced well above their initial IPO range, with an average first day of trading gain ranging from a low of 13.6% in April (yeah, that's the low!) to a high of 32.3% in February …

Normally, a hot IPO market is a direct result of a strong market and robust economic times. However, the sheer number of IPOs hitting the market this year is making it difficult on individual and institutional investors to keep up on exactly what these companies do and how they make money. In other words, the market is overwhelmed and oversaturated with new issues, and that's not a good thing.

… The pace at which IPOs are coming to market and their initial first-day pop just doesn't seem sustainable, all things considered, and it could be a bubble that's ready to burst.

Logically speaking, the above does make sense, but as we can see with modern equity markets, common sense is taking a back seat to pump-priming. There is indeed a Wall Street Party going on, as we've pointed out, and the IPO market, in fact, is a large part of it.

When markets are stuffed with money, volatility certainly becomes a concern. We recall the 1987 Crash was brutal, yet markets gradually climbed afterwards, culminating in the tech boom of the late 1990s. Loose money is generally a powerful support for higher averages and stronger numbers.

And yes, this could continue for a while because the REAL economy has not yet felt the full impact of what's going on in the stock market. Not for the first time, we find ourselves proposing that an elite meme may be, in the short term anyway, a self-fulfilling prophecy. There are fewer of them in the 21st century than the 20th but they do exist.

After Thoughts

The stars have been aligning for the US stock market for several years now. The result may be ephemeral … or not. Time will tell. In the meantime, we'll point it out.

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