Equities Bubble 2010?

The Nasdaq is trading at the 2 year high and is currently just 250 points away from it’s 2007 peak, which was a 7 year high and was also the peak before the real estate bubble burst in 2008. The underlying problem with the market being at this level is that economic data completely contradicts price activity.

The Composite is 1400 points off of the lows in 2009 and is outperforming the DJIA and S&P 500. If the Nasdaq can eclipse 2862, it will officially be in a bull market. Wall Street has fared well on news of QE I and II, being that the program is supposed to increase demand, and naturally, inflation. However there is little or no economic data that supports that demand has or will increase.

Unemployment has since dramatically increased and just last friday, U3 reached 9.8%, a number that I feel is understated due to the amount of people that continue to leave the workforce.

Personal Savings is also substantially higher and the 2009 Stimulus had only a brief effect on consumption whereas it seems that QE hasn’t done much outside of slowing down the rate of savings. It seems overkill to present charts because most Americans are already aware of how difficult it is becoming to make ends meet. However I think it’s necessary to point out the discrepancy between economic data and market pressure as these types of contradictions have occurred in the past and have been the cause of major market collapses.

In the same op-ed, these two quotes are stated by Bernanke:

“This approach eased financial conditions in the past and, so far, looks to be effective again,” he writes. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

“Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10%, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer,” Bernanke writes. “The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.”

When price activity continues higher as fundamentals weaken, you get what’s called an asset bubble.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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