Print Enough Money, Everything Goes Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The stock market continued its Bear Market rally yesterday with a massive up day. The rally was impressive by almost any measure except volume, which was below average most of the day and just hit average at the close. Breadth (stocks going up versus those going down), was 41 to 1 and this was possibly a record. Small caps led the way with the Russell 2000 up 8.4%. The S&P 500 was next with a rise of 7.1% followed by the Nasdaq which gained 6.8%. The Dow was up 6.4%. If anything, yesterday's market action could be described as a crash on the upside. Panic buying was very clearly taking place in the last half hour.

If you read this blog regularly you will remember that we warned of a spectacular bear market rally more than once within the last several weeks. While yesterday was extreme even for a bear market rally, it was quite predictable. The market was severely oversold, possibly the most in history. At some point everyone who wants to sell has done so and then the only direction to go is up because there are no more sellers left. You need to close out any shorts once you see the market turn and ride the rally up. Don't stay at the party too long however. Once you have made nice profits, you need to book them.

While the media has been hyping this as the beginning of a new Bull Market, there is no reason to believe that it is. Financials have led the market up and they are just as worthless today and they were last month. Short covering is driving their rally, not long-term position taking. New Bull Markets are not led by the most beaten down group from the previous Bull Market, but Bear Market rallies are. You would also like to see a move like yesterday's right off the bottom (not after two weeks of rally) on very high volume. The picture is just not quite right.

Stocks will be going up in the long term however. If the central banks print enough money (and they are busy doing this at a breakneck pace), the price of everything goes up. The most important determinant of stock prices is liquidity (you can think of this as excessive money creation) and this trumps everything else including bad economic numbers, lower earnings, and a bleak outlook for this that and the other thing. As an example, the biggest stock market rally globally in 2006 was in Zimbabwe even though the economy there was collapsing (they were the top money printers in the world however). If you stay focused on what really matters, you can make a lot of money in this environment. Just don't expect to hear about what you should be doing from the mainstream media. They will invariably steer you in the wrong direction.

NEXT: Good News Drives Market Higher

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.