By Kris Sayce
Is it time to get excited about the stock market yet?
This morning the U.S. S&P 500 gained 3.4%. The CNBC presenters were beside themselves with excitement.
What excited them even more was the 3% drop in the gold price… to USD$1,835. That’s a fall of nearly $100 since earlier this week. And maybe it’ll fall further…
Or maybe it won’t.
But, let’s calm down and reflect before you jump in and buy so-called bargain stocks. Because before you buy you’ve got to understand why the market is behaving this way.
Well, let me show you…
Cop a look at this chart. It’s the three-month chart of the U.S. S&P 500:
The key period is the past two weeks. The period of extreme volatility gives away what’s really happening.
It’s all based on what one guy with a beard may or may not say at a speech in Jackson Hole, Wyoming later this week…
In fact, it’s not even about what he’ll say… it’s just as much about how the market interprets what he says.
And unless he explicitly says, “There will/won’t be more money printing“, market players will have to draw their own conclusions.
In other words, you should expect more of what you’ve recently seen – lots of ups and downs.
The way we see it, the market isn’t normal. It’s become a Dr. Jekyll and Mr. Hyde market. Or should that be a Dr. Bernanke and Mr. Market market?
To explain what we mean, let me show you another chart.
This one is the five-day comparison of the S&P 500 index (blue line) and the SPDR Gold Trust [NYSE: GLD] (red line) exchange traded fund:
By the way, for the first time ever, earlier this week the market capitalisation of the SPDR Gold Trust ETF exceeded the market cap of the SPDR S&P 500 ETF [NYSE: SPY].
We guess that means more folks are buying gold.
Anyway, what drove the gold price up over the past week? That’s right, the prospect of U.S. Federal Reserve chairman, Dr. Ben S. Bernanke playing clickity-click with his keyboard to create a few hundred billion new dollars.
What drove stock prices down? That’s right, fear of the U.S. economy going into recession and the Fed needing to print more money.
Roll forward a few days…
What drove the gold price down last night? The prospect that Dr. Ben S. Bernanke would clickity-click on his keyboard to create a few hundred billion new dollars…
[Reader’s voice: hang on a minute, you just said that was the reason for gold going up!]
Don’t panic, we’re about to explain.
The reason gold went down last night and stock prices went up was because all the lovely new money could stop the U.S. economy going into recession. And that’s good for stock prices.
If you think this makes no sense… that surely printing more money is printing more money… then you’re right. But nothing makes sense in financial markets anymore.
In reality nothing will stop the U.S. going into recession. And odds are it already is in recession.
The market is just to-ing and fro-ing between looking at the glass half full and looking at it half empty… where in reality it’s the same glass with the same contents… nothing has changed one day to the next.
Today the market forgets the reason to buy gold is to protect against central bank money-printing. All it sees is money-printing causing stocks to go up…
So investors dump gold and buy stocks.
What will they do tomorrow?
Who knows?
They’ll probably buy more stocks and sell more gold… but then again, perhaps they’ll do the opposite.
What we do know is this: market and economic fundamentals are playing absolutely no part in the current market action. None whatsoever.
The only influence on the market is one man: Dr. Bernanke.
We’re prepared to say that no one person in the history of financial markets has had as much influence on markets as Dr. Bernanke.
This is surely why it’s no coincidence that markets have been almost as volatile as they’ve ever been.
We’re sure you’ll get the temptation to dive in to pick up a bargain here or there. But we’d say resist… for now. This is a market for big risk-takers (traders and small-cap punters). It’s not a market for conservative investors.
For you, if you’re a long-term investor… someone who’s thinking about saving for retirement our advice is to sit back with a bucket of popcorn and just watch the market to-and-fro.
Cheers.
Kris
PS. If you’re not a conservative long-term investor and you fancy a punt on the markets, then believe me, there’s plenty to punt on. But make no mistake, rapid price moves can play havoc with your nerves… and havoc with stock prices. If you can’t face seeing a stock price rise 20% after falling 15% the day before then steer clear. But if you want the potential to pick up big returns from small-priced stocks then why not check out some of my recent research. Click here for more details…
Money Morning Article: The Strange Case of Dr. Bernanke and Mr. Market