All Is Well In Stock Land. Or Is It?

Since February 5th, 2010 the major market indexes have had one of the most impressive rallies in an incredibly short span, trading higher by more than 15 percent. The SPDR S&P 500 ETF (NYSE:SPY) traded as low as 104.58 on February 5th, 2010 and is now trading at 121.25. That is almost 17 points higher in less than 3 months. The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) , and the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQQ) have traded higher in the same fashion. Rarely do individual high flying stocks make this type of a move in a year’s time, let alone individual indexes in less than 90 days.

The news is wonderful, fantastic, and outright bullish. Stocks such as Apple Inc. (NASDAQ:AAPL), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and countless others have reported blockbuster earnings numbers. New 52 week highs have increased recently. The Retail Holders Trust ETF which tracks the retail sector is at new highs for the year and near its all time high which was in 2007. These are moves that are off the charts and impressive by all standards.

While everything looks great in the stock world there is one problem with this rally. Why is the Federal Reserve Bank keeping the Fed funds rate at zero percent? This rate allows the liquidity to flow endlessly. It allows the major banks to make money without lending due to the steep yield curve. They can simply borrow interest free money and buy the stock market, U.S. Treasuries, and issue high interest credit cards. What a business to be in when you can get free money.

The last time the Fed funds rate was lowered to unprecedented levels was in 2001 when Alan Greenspan lowered rates to 1.00 percent. At that time the economy was recovering from the dot com bubble and the 911 tragedy. In just five short years that action by former Fed Chairman Greenspan caused the greatest credit bubble since the Great Depression in 1929. Currently Ben Bernanke has the Fed funds rate at zero percent for well over a year now. One can only wonder what kind of bubble this is creating. In a few more years we could be looking at the next great bubble. However, this time it could be worst as unemployment is still high and the housing crisis is still intact.

Yes, the stock market is in bull mode right now. Why wouldn’t it be when you think about it? The artificial stimulus is running wild. Everyone lives for the moment and never thinks about tomorrow. The only problem is tomorrow’s bubble may not be so easy to come back from. Lowering the Fed funds may not work the next time around. You have been warned.

Nicholas Santiago
Chief Market Strategist