U.S. Stock Market: Bulls Still In Control?

Given the new all-time record high posted last week in the S&P 500 Index, perhaps there shouldn't be a question mark in the title of this column today. Bearish pundits (like me) must be shaking their heads at the extraordinary resilience of the current bull market which has now lasted 65 months. 

The S&P 500 Index bottomed in March 2009 at 666.80. It peaked last week at 1994.75, almost triple the intra-day low set 5 1/2 years ago. 

Despite very minor losses in some indexes this past Friday, most major indexes posted gains last week of between 1.50% and 2.00%. And among these major benchmarks, only the Russell 2000 Index is in negative territory year-to-date so far in 2014. Even this laggard is only down 0.28% on the year. It seems like almost everything is up nicely. Biotech stocks lead the way with average gains near 26%. Semiconductor stocks are up almost 20% year-to-date, utility stocks are up about 13%, and transportation stocks are up about 14%. Heck, even gold/silver stocks are up, with the Philadelphia Gold/Silver Index ahead 18% on the year. And as incredible as it sounds, long-term Treasury bonds are actually up 15% this year so far!

Explanations for all this positive price action are certainly possible in hindsight, but even with this "perfect" vision I personally would not like to be the one to explain it all. And I doubt there is anyone on Wall Street who had a forecast that matched reality over these last 8 months. 

Fed Chair Janel Yellen appears to be facing a slightly more hawkish voting membership at the FOMC, but she doesn't appear ready for any dramatic changes in the current path of relatively accommodating monetary policy. The so-called "taper" of quantitative easing (QE) is steadily progressing and will probably end as expected in October 2014. However, ZIRP (zero interest rate policy) is likely to continue into at least mid-2015, if Ms. Yellen's latest speech (at Jackson Hole) is any indication.

The latest investor sentiment surveys reflect too much bullishness by often-wrong investors (AAII in particular), but this forecasting tool has been almost worthless over the last five years. There are many bearish divergences and negative non-confirmations in the technical data, but these tools have also been less than helpful in recent years. For most investors, two tried and true formulas have worked better than almost every other guideline or system. Those two are "the trend is your friend" and "don't fight the Fed".

My own computer trading system flashed the first monthly chart sell signals last month since July 2007. Of course, the S&P 500 Index is already above its July peak, and the Nasdaq Composite Index is now at its highest level since March 2000.

In the interest of full disclosure, my short position in the S&P 500 Index is still in place, but every day is a challenge with respect to the choice of liquidating or adding to this losing position. I think most investors are underestimating the negative impact on liquidity from the ongoing taper of the Fed's quantitative easing program (now down to $25,000/month vs a high of $85,000/month last year). However, ZIRP seems to more than offset this negative for now, and bullish stock investors are the clear winners year-to-date.

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals