A price/volume diagnosis of the stock market

As the American people hear the testimony of our public health leaders, now is as a good a time as ever to get a clear look at the stock market since it’s bottom back at the end of March.

Before looking at the below charts, we need to be reminded of the fact that demand will always drive long-term price trends across both economies and capital markets. Both fundamental demand and price will always eventually meet each other regardless of short-term narratives and artificial quantitative policies.

One important factor that plays a central role in prices and trends is inflation. As we all know, the goal of the Federal Reserve is to promote full-time employment and stable prices. The fact remains that if inflation becomes unstable, stock prices will suffer. Given this morning’s BLS report that in April, the Consumer Price Index fell 0.8% (up 0.3% over the last 12 months) and the CPI less food and energy fell 0.4% in April (up 1.4% over the year) should be of major concern to all stock investors going forward.

The Health of the Stock Rally – Broadly

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The Health of the Stock Rally – The Big 5

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The Big 5 (as of April 27, 2020:

1) Microsoft (MSFT), Market Cap ($M) 1,324,517.03, Index Weight 5.6%

2) Apple (AAPL), Market Cap ($M) 1,239,179.70, Index Weight 5.0%

3) Amazon (AMZN), Market Cap ($M) 1,184,495.45, Index Weight 4.3%

4a) Alphabet Class C (GOOG), Market Cap ($M) 875,354.44, Index Weight 1.9%

4b) Alphabet Class A (GOOGL), Market Cap ($M) 873,868.94, Index Weight 1.7%

5) Facebook (FB), Market Cap ($M) 534,635.90, Index Weight 1.6%

Message

This divergence is 1) a sign that the rally in both the broad market and the 5 lone stalwarts of the market is treading water at best despite even last week’s rally and 2) the market is being driven by beliefs and narratives and not fundamentals. This type of investing is pure speculation.

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