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This Rally Is in Its Infancy

Posted by nexvucapital on February 20, 2013

Once in a while we find a big picture piece that is so importantly on topic that we feel the overwhelming need to send it to our readers. Here is the opening for one such item:

This Rally Is In Its Infancy By Andrew S. Parlin

There are two decidedly different ways to look at the market’s rally.

The first one invites caution. From its March 2009 low nearly four years ago, the S&P 500 has compounded at a spectacular annual rate of 24%. Against the backdrop of a long list of “overbought” signals, a cloudy earnings picture, and an economic recovery that appears to be struggling, why not bail? After all, this has been one heck of a good run.

The other way to think about the market is to study its progression since WWII and note that the two very long secular rallies (1942-1968 and 1982-2000) were punctuated by two periods where the market took a very long time to advance to new highs (1968-1982 and 2000-?). This approach would acknowledge that markets may well be extended on a short-term basis. But it would also beg the question whether we may at last be coming to the end of one of those protracted periods of going nowhere.

At the Inflection Point

During the 14-year period from 1968 until the summer of 1982 the market did anything but move sideways, yet it was well capped on the upside throughout the entire period save for a brief fake-out in late 1980. It then broke out furiously beginning in mid-August 1982 as the market recognized that the long hard battle against inflation had finally been won. Similarly, today, the market may well be signaling that Bernanke is winning one of the most obstinate battles of disinflation since that Great Depression. Perhaps the long nose of the market is sniffing out a pickup in GDP growth and a return to more normal times. This would include a healthy inflation cushion of 2.5-3%.

Markets do indeed appear to be at an inflection point. We seem to be leaving the post-crisis era of what might best be called the “reluctant rally” of 2009-2012 and entering into a new phase marked by a structural shift in asset allocation preference and even a healthy return of greed.

Read the rest…



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