The One Chart That Explains The Entire Stock Market Rally
Many a market participant has been wondering what is causing this relentless drive higher in the stock market. As I have pointed out in the past couple of days, there has been a lot of pontificating on trying to explain the unexplainable. This price move could not have been predicted at the March, 2009 lows, and anyone who tries to tell you that they had it right from the beginning because this indicator said so, then I have a piece of land to sell you in sunny Florida.
But wait, I have found the one chart that explains what this historic rally has been all about. It may not have predicted the rally, but it does explain the rally. See figure 1 a weekly chart of the SPDR S&P Retail ETF (symbol: XRT).
Figure 1. XRT/ weekly
Yesterday, XRT eclipsed its 2007 high by several cents. Let me state that again in case it didn't sink in the first time. Yesterday, XRT eclipsed its 2007 high by several cents.
All you need to know about this rally is contained in this one chart. And with the XRT back at its bull market highs, the only explanation I can find for this is speculation. Speculation that the consumer is back. Speculation that our consumption based economy is back. Speculation that our housing problems never existed and don't exist in the future. Speculation that a 10% unemployment rate doesn't matter. Speculation that all is going to right again.
The retail sector is back at its 2007 highs. Wow! It is all good, again.
Are things really as good as 2007? Or maybe, we are headed back to 2007 and the market - being the all seeing and all knowing beast that it is -is just telling us that (cough, cough, wheeze).
But somehow, I am not buying it. And I doubt you are too.
One drive through the major retail section of our town, which is in the top 20 metropolitan areas by population, is enough to tell me that there is no boom. The only boom has been the number of businesses that have gone under. I am sure it is no different in your town. We like to say that we have a new business in town called "Space for Lease", and judging by the increasing number of signs in store fronts that say "Space for Lease", we can only assume that it must be a really "hot" business. And I am sure this really "hot" business has been franchised to your town too.
And with an 11% statewide unemployment rate and gas prices hovering around $3 a gallon, I cannot see things getting better anytime soon. But better they must get because this is what the stock market and XRT is telling us.
Technically, the breakout that we had highlighted several months ago in our article entitle, "The Bullish Case For Equities," has catapulted prices back to the 2007 highs. If there ever was a definition of a double top, this looks like it. It would seem unlikely that price has enough momentum to thoroughly and convincingly bust through.
The rally has been driven by speculation. There is nothing wrong with that. With the retail sector back to its 2007 highs, the speculation must be the hope that everything will turn out ok. Common sense would dictate otherwise.
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