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MLR - Premarket Pulse 4/1/13

Major averages ended the quarter up on higher volume with the S&P 500 making an all-time closing high while remaining just below its all-time intra-day high. The move takes the S&P 500 back to the top of a 13-year "secular bear market" range similar to that last seen in the 1970's as well as the 2007 peak that eventually resolved into the brutal bear market of late 2008. "Improving" U.S. economic conditions as well as rising corporate profits are part of the reason for the market's performance but the bigger reason runs deeper. Despite bond yields at or near all time lows which imply an economy that has yet to spark, stock index prices say things are humming along nicely. This disconnect between bonds and stocks is due to quantitative easing which is flowing out of the U.S., the U.K., Europe, and now Japan, with Japan's stock market less than a percent from its February 2011 high.

While fourth-quarter GDP came in at 0.4% missing 0.6% expectations, and jobless claims and Chicago Purchasing Managers Index both missed views, this did not rattle markets. In fact, not much seems to push markets lower these days. The first quarter was the strongest first quarter for US equities since 1987, with the majors up 10-11% despite the near collapse of a Eurozone banking system with problems in Cyprus, Greece, Italy and other dominoes, not to mention war, terrorism, and nuclear issues in Afghanistan, Syria, Pakistan, and Israel.

So while the printing presses continue to roll, sluggish demand from a lackluster economic recovery as well as bank lending constraints have kept it from being put to immediate economic use. So the money instead finds where it will get the best return which happens to be stocks. How long can this QE bubble last? As with all past bubbles, price/volume action in leading stocks and major indices should reveal all before the bubble bursts, if history going back centuries is any guide. Meanwhile, testimony to the strange times we live in is found in near 0% interest rates, U.S. GDP growth at a very tepid annual rate of about 1.6% despite the most massive monetary and fiscal stimulus seen in the history of mankind, and a market that is now at the top of a 13-year "secular bear" range with the potential to break out into a new "secular" bull phase if we assume that the QE bubble will continue! Strange times, indeed.

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