In spite of my rosy predictions about the direction of stocks which I generally still adhere to, many of my readers know I still have many concerns about the disinflationary trends that are manifesting themselves in this country and the deflationary juggernaut that still holds the world in its grip. Central banks have been able to hold these deflationary pressures in abeyance for the past five years in spite of some close calls with the result that asset prices (save commodities) have exploded.
At this point, the stock market is running on sentiment (contrarian) as much as anything else. Certainly, earnings have been steadily weakening and the only arguments we here in defense of this incredible rally is mediocre economic stats and that stocks are the only game in town because the return on fixed income is all but non existent.
Here are two charts that tell a story of the financial markets since those dark days of 2008:
It's clear from the chart that Fed cash to primary dealers and the levitation of the stock market are closely correlated and this is nothing new to those involved in the financial markets.
However, as I've repeatedly pointed out in the past, the effects of POMO and QE have not had the same effect on commodities . Here's a chart of the Dow Jones UBS Industrial Metals Index ($DJAIN) with the S&P 500 (white line) superimposed upon it and the highlights of the FED's liquidity operations over the past five years: